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Bonus schemes: Why HR can’t move the goalposts after the event
Adrian Fryer
A recent Employment Appeal Tribunal decision serves as a useful reminder that even discretionary bonus arrangements can create enforceable contractual rights once discretion has been exercised.
In Chandrashekarappa v Wipro, an employee was told he could receive a discretionary “kitty bonus” of up to 1% of revenues from new business, subject to approval from the relevant sector lead. After he secured a major contract, the sector lead approved the full 1% bonus. However, before payment was made, the employer introduced additional approval requirements and a bonus cap, reducing the award significantly.
The Employment Appeal Tribunal held that this amounted to an unlawful deduction from wages. Once the sector lead had exercised their discretion in accordance with the scheme as communicated to staff, the employee’s entitlement had crystallised. The employer could not retrospectively impose new conditions or limits that were not part of the original arrangement.
For HR teams, the key lesson is that using the word “discretionary” does not mean that the goalposts can be moved at any time up to payment. While employers may retain discretion over whether to make an award, once that discretion has been exercised, and the employee’s entitlement has been determined, a contractual right to payment may arise.
The case also highlights the importance of understanding when contractual obligations are formed. Employers should ensure that bonus schemes clearly set out all approval processes, conditions and caps from the outset. If additional approvals are required, these should be communicated before any decision is made, not after.
When reviewing incentive arrangements, HR should check that scheme documentation accurately reflects how decisions are made in practice. Attempting to change the rules after an employee has met the relevant criteria risks not only employee relations issues, but also claims for unlawful deductions from wages.