Off the record: Poor performance, slashed bonus?

October 25, 2006

Off the record: Poor performance, slashed bonus?

An employee has underperformed this year and doesn’t deserve the same bonus as he received in 2005. Could the employee bring a case against the employer if the employee feels this is unreasonable? Carl De Cicco, Associate at law firm Reed Smith, explains.

The answer to this question is yes. However, there are a number of things that an employer can do to both limit the possibility of an employee bringing a claim in these circumstances and to reduce the chances of such a claim succeeding.

The first point to note is that whilst many bonuses are described as discretionary, the law is that such discretion is in no way absolute or unfettered. The Courts and Tribunals will not permit an employer to exercise their discretion irrationally or perversely. Clearly, an employer therefore needs to show a basis for making a low or no award of a bonus to an employee that will stand up to legal scrutiny.

The second point to note is that, given the employer’s need to show that discretion has not been exercised irrationally or perversely, a low bonus being given to an underperforming employee is easier to justify than no bonus at all. Even the poorest of performers is likely to tick one box on the bonus criteria sheet. For example, they may have turned up for work on time every day, even if they regularly forget to bring their thinking cap with them. In the event a disgruntled employee brings an action against an employer, it will be easier for that employer to say that the individual received a low bonus because they only displayed certain limited competencies or made only limited attempts to improve. This is preferable to the employer having to argue that even such limited competencies did not exist and that the employee did not deserve any bonus at all.

The third point to note is that whilst heeding the two points above will increase an employer’s chances of success before a Court or a Tribunal, it is far better to reduce the possibility of an employee bringing such a claim in the first place. As with everything else in the field of human resources, communication is the key to doing this. An employer may be more than aware that an employee’s performance has dropped and that the employee deserves a lower bonus than awarded in the previous bonus cycles, but is that employee equally aware?

A good employer should ensure that the employees know how their performance is rated by holding regular performance appraisals that tie in with appropriate bonus cycles. These don’t have to be entirely downbeat affairs where the sole focus is the lower standard of performance. Appraisals can also provide an opportunity to discuss the standards required in future and the higher rewards that will be available if these standards are met. By ensuring that an employee is aware and hopefully in agreement that performance has slipped, the employer will limit the chances of an angry reaction from the employee when the employee is notified of the actual amount of bonus they are to receive.

Finally, employers who operate bonus schemes that are expressed to be discretionary may wish to consider moving to more transparent arrangements that are understandable to employees. Setting and publishing clear criteria for achievement of bonus provides guidance to both employees and those managers who have to decide on the level of bonus to award. This will mean that those employees who have performed poorly, and have been given performance appraisals so that they are aware of this, should have no expectation of a higher bonus than that to which they are entitled under the published bonus criteria. In such circumstances an employee would have little to gain from bringing a claim in relation to a low bonus and this should act as a natural deterrent.

For further information please contact Carl at rdhindsa@reedsmith.com

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