Bonuses are at the Absolute Discretion of the Employer.... Right?!?
Article last updated 2 June 2023
We can all be forgiven for thinking that employee bonuses are and always will be, subject to the complete discretion of the employer, but what if you were told that that isn’t always the case?
The recent decision in Subasic v Hewlett Packard Australia Pty Ltd [2020] ACTSC 2 has continued to chip away at the ‘absolute discretion’ defence and confirmed that an employment contract that states a bonus is “in the absolute discretion” of the employer, doesn’t mean the employer has the unlimited power to change how the bonus is paid or withhold payment and in fact, such a decision will be a costly one.
So What Happened?
Melinda Subasic was employed by Hewlett Packard Australia Pty Ltd and her contract of employment included the payment of an incentive scheme that was “subject to change or cancellation at [the employer’s] discretion”.
Subasic’s performance was of such a high standard that she generated a significantly large incentive payment of $446,250.39 under the incentive scheme and when it came time to pay up, Hewlett Packard Australia Pty Ltd sought to implement a cap that would limit the amount that she would be paid to just $136,500.00. Understandably, the employee sued.
What Did the Court Say?
The Supreme Court of the Australian Capital Territory found that by changing the incentive scheme, Hewlett Packard Australia Pty Ltd breached the employment contract.
It also held that the discretion to change or amend the scheme was to be exercised “honestly and conformably with the purposes of the contract”, which was not evident in this case.
The Court also found that the employer was not permitted to decide arbitrarily, capriciously or unreasonably that it need not pay an incentive payment where the set objectives had been satisfied.
Quite simply, Hewlett Packard Australia Pty Ltd did not have the discretion to simply impose new terms and decide to withhold the incentive after it was validly earnt.
The employee was awarded $309,750.39 plus interest in the sum of $61,568.19 and Hewlett Packard Australia Pty Ltd was ordered to pay costs.
The Lesson for Employers
The decision in Subasic v Hewlett Packard Australia Pty Ltd [2020] ACTSC 2 is a worthwhile reminder to employers that ‘absolute discretion’ isn’t actually absolute and employers should plan ahead and tread carefully when implementing and managing employee incentive schemes.
It is also a worthwhile reminder that withholding employee incentives is a dangerous option as businesses look at ways to reduce costs in the wake of COVID-19 and it is vital to get sound legal advice before taking steps that could cost your business far more in the long run.
Enterprise Legal is aware that this case has been appealed however the appeal was dismissed and therefore the contents of this article remain current.
If you would like to know more or you would like to speak to one of our Workplace Relations specialists, contact Enterprise Legal today for a free introductory consult: