Bonus schemes: be careful about changing the rules

A recent Employment Appeal Tribunal (EAT) case is a useful reminder that employers can’t always change the rules of a bonus scheme after a decision has been made.

Chandrashekarappa v Wipro

In Chandrashekarappa v Wipro Ltd an employee was told he could receive a discretionary “kitty bonus” of up to 1% of the revenue generated from new business, as long as it was approved by the relevant sector lead.  After the employee secured a major contract, the sector lead approved the full 1% bonus.

However, before the bonus was paid, the employer introduced new requirements. It added another level of approval and placed a cap on the amount that could be paid. As a result, the employee received much less than he had originally been told he would receive.

Change was unlawful deduction from wages

The EAT found that this was an unlawful deduction from wages. Once the sector lead had approved the bonus under the rules that had been communicated to employees, the employee had become entitled to it. The employer could not later add new conditions or reduce the amount payable.

4 key takeaways for HR

1. A bonus described as “discretionary” does not give employers complete freedom. Once a manager has exercised their discretion and approved a payment, an employee may have a legal right to receive it.
2. Make sure that bonus schemes clearly set out all approval processes, limits and conditions from the start.
3. If senior sign-off or payment caps are required, these should be included in the scheme before any decisions are made.  
4. Think carefully about timings before changing the rules of an incentive scheme. Once an employee’s entitlement has been established, it may be too late to change.

Further reading

• Bonuses – ACAS
• How to draft a discretionary bonus scheme – Hunter Law
• Employers guide to bonuses during maternity leave – Hunter Law