Two recent cases regarding employees’ bonus payments and overtime rates clearly illustrate the importance of establishing whether such rights are discretionary or contractual.
In the case of the bankers, some 104 ex bank employees raised court won their breach of contract claims after their bonus payments were reduced by 90 per cent following a takeover. Staff had been led to believe they would have higher bonuses following the creation of a minimum bonus pool to encourage staff to remain and prevent mass defections.
However when staff were issued with their usual end of year bonus letters a “material adverse change” clause had been inserted, which meant the bonus could be reviewed if the bank’s financial position deteriorated. Bonuses were in fact slashed because losses were greater than expected.
The High Court rejected the bank’s argument that the bonuses were discretionary, concluding that the Chief Executive’s announcement of the bonus pool was contractually binding. The bank has indicated it will appeal.
In the case of the Boots employees, 19 pharmacists complained of unlawful deductions from their wages after Boots Management Services Limited cut the hourly pay rate for working on Sundays from double time to time and a half.
The staff complained the premium pay rate was contractual and the company had no right to reduce it without their agreement. Boots claimed it was discretionary.
The employment tribunal judge held the premium payment was not discretionary and that the company had no right to vary the contract.
The above cases show the problems that can be encountered when employers seek to alter employees’ pay and conditions without their agreement. They should first of all clarify if the term is contractual or discretionary. Even if discretionary, it may have developed into a contractual right over time. Employers should call their legal manager for further advice.