Can a discretionary bonus be varied so that an employee can become contractually entitled to it?

Yes, the Employment Appeal Tribunal (‘EAT’) has concluded, in the case of Bluestones Medical Recruitment Ltd v Swinnerton, that a bonus, purely discretionary in nature can be varied to become contractual in nature. However, a claim on that basis cannot succeed unless the tribunal reaches clear findings on how that variation occurred.

Mr Swinnerton (‘the Claimant’) initially worked for Bluestones Education in 2013 but transferred to Bluestones Medical Recruitment Ltd (‘the Respondent’) in 2014 as a Medical Recruitment Consultant. The Claimant was promoted as a General Manager in 2015. The Claimant’s contract in 2014 provided for a non-contractual discretionary bonus. From the outset of his employment, the Claimant had been paid a bonus out of a shared 10% pot, based on monthly gross margin. However since becoming General Manager, it was intended that the bonus would be paid quarterly from the net profit of the business. Additionally, the bonus was said to be paid by way of a loan to the Claimant, which he would then pay back by way of dividend.

Before the Claimant was to become a shareholder as intended, the Claimant was suspended and then dismissed for a number of reasons regarding dishonest and fraudulent activity by former employees of the Respondent. During his suspension, the Respondent stopped paying the bonuses.

The Claimant brought a claim for unfair dismissal and an unlawful deduction of wages in respect of unpaid bonus, in the sum of £4,687.87.

The Employment Tribunal (‘ET’) concluded that not paying the Claimant his bonus amounted to an unlawful deduction of wages as provided by s.27 Employment Rights Act 1996. Although the dismissal itself was lawful, the ET nonetheless found that there was an agreed variation to the Claimant’s contract, arising primarily by virtue of custom and practice, which meant that the discretionary bonus was now contractually binding on the Respondent.

While the Claimant argued that simply describing a bonus as discretionary does not necessarily mean that the employer has a right not to pay it, the Respondent appealed to the EAT. The Respondent argued, primarily that the ET failed to carry out the required assessment of the relevant circumstances to displace the express discretionary bonus term with an entitlement based on custom and practice.

The EAT has raised difficulty with the ET’s approach in considering how it carried out the relevant assessment. Accordingly, the EAT has decided that the unauthorised deductions claim cannot stand without a different tribunal assessing the relevant variation to determine that the bonus is now contractually binding in nature.

There is some merit to this case in highlighting that just because a bonus is expressly written in an employee’s contract as ‘discretionary’, does not mean that any given tribunal can rule that the bonus is in fact contractual. The difficulty here is placed on the tribunals to properly assess how the variation, if any, has actually occurred.

The variation most commonly applied to find that such bonuses must be paid is by virtue of custom and practice. For example, an employer is likely to be bound to pay their employees their annual bonus (even if discretionary in nature) if they have always done so. Accordingly, employers should be mindful not to simply ‘pick and choose’ as and when they pay their bonuses and should adhere to their standard practices as to avoid a potential successful claim for unlawful deduction of wages.