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11th June 2009

USE YOUR DISCRETION

Small and ors v Boots co plc

Some employers pay a bonus which is dependent on performance and therefore described in staff handbooks and other documentation as discretionary. In Small and ors v Boots co plc, the Employment Appeal Tribunal (EAT) held that labelling a bonus scheme as “discretionary” did not necessarily mean that it did not have contractual effect.

Basic facts

Mr Small and his colleagues were employed by Boots in two of their warehouses near Nottingham. The claimants employed in one warehouse transferred over to Unipart in August 2003 and those employed in the other transferred in April 2004.

Both transfers were covered by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (known as TUPE). In April 2007, the warehouse undertakings were transferred back to Boots, this time under the 2006 TUPE regulations.

Before the transfers, the warehousemen had benefited from a bonus scheme with Boots that had paid out every year since 1967, apart from two years when performance targets were not met. These were referred to as “discretionary” in the staff handbook. They received the bonuses from Unipart in 2004 but not for 2005 and 2006. Nor did they receive a bonus in 2007 from Boots.

Mr Small and his colleagues lodged an employment tribunal claim for unlawful deductions from wages, on the basis that they had not been paid the bonuses to which they were contractually entitled.

Tribunal decision

The employment judge dismissed their claims, holding that the warehousemen did not have (nor had they ever had) a contractual entitlement to a performance-related bonus. This was because the documentation relating to the bonuses stated that they were “discretionary” and although they had been in operation for many years, they were never given contractual force by a variation in their contracts.

Although Unipart had given assurances about bonus payments to the claimants and their representatives before the transfers took place, these were nothing more than “warm words” and did not amount to a contractual commitment to make the payments

EAT decision

The EAT partly upheld the claimants’ appeal and remitted a number of issues to the tribunal for it to reconsider.

It said that it first had to consider whether the fact that a bonus scheme was expressed to be “discretionary” was decisive as to whether it was a contractual entitlement or not. The EAT held that just labelling a bonus scheme as discretionary did not necessarily mean that it did not have contractual effect. It said that the word “discretionary” could relate to the “decision each year to operate a bonus scheme, to the method of calculation of bonus or to the threshold which triggers a bonus or to whether and if so what percentage of salary will be paid”.

It held that, in treating the use of the word “discretionary” as determinative of the issue, the employment judge had failed to take into account other relevant circumstances, including the fact that Boots had made payments “over many years”. The case was therefore remitted to a different tribunal for rehearing.

However, it said that the employment judge had been entitled to conclude that Unipart had not entered into a contractual commitment to pay a bonus. This was despite the fact that it had given assurances to employee representatives about continuing the bonus scheme, post transfer, when complying with TUPE information and consultation requirements.

The second issue on which the appeal succeeded was the tribunal judge’s conclusion that he had no jurisdiction to deal with the claim as it was not for an ascertainable sum of money. That question depended on whether the employees were claiming an entitlement to bonuses calculated in accordance with the Boots scheme – which were readily ascertainable – or under a substantially equivalent scheme – which were not. Again, that issue was remitted to a different tribunal.

Comment

This case is helpful in the context of “discretionary” bonus schemes. It is important in such cases to determine what aspect/aspects of the bonus scheme is/are “discretionary”. Subject always to the precise wording of the scheme, the way in which a scheme has been operated over the years can be relevant in determining that question.