Where an employee is promised a discretionary bonus as an incentive, an employer may be held liable for the full figure if the preconditions have been met and the chain of authorisation is fully satisfied. Indeed, a recent ruling by a tribunal has made it clear that employers cannot unilaterally alter the preconditions or quantum of a bonus once the agreed terms have been met and approved.
The contention arose after a global cloud hosting platform introduced a bonus incentive scheme, which, according to the presentation slide deck, offered sales staff a discretionary bonus of "up to 1%" of revenues derived from invoicing any new client over the first twelve months of the contract, subject to the approval of the Sector Lead Head (SLH). Soon after this offer was made, the claimant secured a major contract with a prominent retailer, whereupon the line manager formally emailed the SLH to recommend the full 1% commission. The SLH duly authorised the bonus in a recorded ‘memo’. However, the senior management baulked at the prospective payout of £516,082 and sought to retroactively apply a £150,000 bonus cap. While the initial claim for the unlawful deduction of wages was dismissed on the ground that no legal entitlement had crystallised, this was overturned on appeal, as the objective terms of the bonus scheme had been clearly outlined, met, and approved by the designated authority.
Crucially, once the SLH had authorised the bonus, the claimant's entitlement to 1% of the first year’s revenues had legally materialised, and the employer had no legal right to cap the bonus or insist upon additional management sign-offs. Thus, discretionary bonus schemes do not automatically grant employers unrestricted authority to alter payment terms at their whim, as, once an employer has established a discretionary bonus framework, communicates its specific terms to an employee, and subsequently exercises its discretion to approve the award, a binding legal obligation has been formed. As a consequence of this landmark ruling, employers should review all bonus incentive schemes to ensure that they do not inadvertently create any unanticipated obligations.
