Bonus schemes: be careful about changing the rules

Can an employer reduce or refuse a bonus after it has already been approved? A recent Employment Appeal Tribunal case is a useful reminder that employers cannot always change the rules of a bonus scheme after a decision has been made.

Discretionary bonus schemes and employee entitlement

In Chandrashekarappa v Wipro, an employee was told he could receive a discretionary “kitty bonus” of up to 1% of the revenue generated from new business, provided it was approved by the relevant sector lead. After the employee secured a major contract, the sector lead approved the full 1% bonus.

However, before the bonus was paid, the employer introduced new requirements. It added another level of approval and placed a cap on the amount that could be paid. As a result, the employee received much less than he had originally been told he would receive.

The Employment Appeal Tribunal found that this was an unlawful deduction from wages. Once the sector lead had approved the bonus under the rules that had been communicated to employees, the employee had become entitled to it. The employer could not later add new conditions or reduce the amount payable.

When does a discretionary bonus become payable?

The main takeaway is that a bonus described as “discretionary” does not give an employer complete freedom. Once a manager has exercised their discretion and approved a payment, an employee may have a legal right to receive it.

HR teams should make sure that bonus schemes clearly set out all approval processes, limits and conditions from the start. If senior sign-off or payment caps are required, these should be included in the scheme before any decisions are made.

This case is a good reminder that employers should think carefully before changing the rules of an incentive scheme. Once an employee’s entitlement has been established, it may be too late to do so.

Here to help

Our Employment team at Longmores helps employers review contracts, bonus arrangements and incentive schemes to reduce the risk of disputes and breach of contract claims. If you need advice on drafting or reviewing bonus schemes, commission arrangements or other employee incentive terms, please contact Miranda Mulligan, Senior Solicitor, in our Employment Law team.

Please note, the contents of this article are provided for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.