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April 2020

Does an employee have a contractual entitlement to a discretionary bonus scheme?

Does an employee have a contractual entitlement to a discretionary bonus scheme?

The case

Subasic v Hewitt-Packard Australia Pty Ltd (2020)

Hewitt-Packard Australia Pty Ltd (HPA) employed Ms Subasic as a sales executive. Ms Subasic’s contract of employment stated she would receive a fixed base salary and a Target Incentive Amount (TIA).

The incentive clause in Ms Subasic’s contract stated: “You are invited to participate in our Base Plus Program [Program] that includes a [TIA] of $57,000 per annum in addition to your base pay. The Program and the TIA are subject to change or cancellation at [HPA’s] discretion and are aligned to market date research conducted from time to time by [HPA]”. The terms of the Program were set out in a policy. Ms Subasic was also provided with a sales letter that set out her sales targets. The Program offered Ms Subasic an accelerator incentive, which meant she could earn above the TIA.

In one sales period, Ms Subasic achieved 500% of her sales targets. The commission payable to her based on her commission rates and sales achievements was $446,250.39. HPA refused to make the payment and unilaterally altered the Program. It exercised its “discretion” under the Program to limit payments to be made to employees. HPA instead paid Ms Subasic only $136,500.

After Ms Subasic resigned from HPA, she commenced proceedings in the ACT Supreme Court to recover the balance of the commission in the amount of $309,750.39. Ms Subasic claimed she had a contractual entitlement to the monies. HPA argued that its Program was discretionary and there was no contractual entitlement to the monies claimed.

The verdict

The ACT Supreme Court found that:

  • Ms Subasic had a contractual entitlement to the monies and HPA was ordered to pay the commission shortfall;
  • the TIA was included in Ms Subasic’s contract of employment and was part of her remuneration package;
  • if Ms Subasic participated in the Program and met her sales targets, which she had done, she was entitled to the monies;
  • while HPA had a discretion to vary or cancel the Program, that discretion had to be fairly and reasonably exercised, and could not be used to defeat a payment already earned by Ms Subasic;
  • HPA had breached the implied term that requires an employer to act in good faith – HPA had beached the term by capping the payment to Ms Subasic without notice and after she had already satisfied the criteria to receive the payment; and
  • HPA had received a benefit from Ms Subasic’s work but retrospectively wanted to alter the terms of the remuneration Ms Subasic would receive for performing that work.

The lessons

Employers that offer incentive, bonus or commission payments need to be careful how these are presented to employees. Ideally, they should not be referred to in the contract of employment. The scheme should be drafted in another document that clearly states the scheme is discretionary and can be altered or cancelled by the employer. Nevertheless, that discretion should not be exercised capriciously. In addition, changes should only be implemented after appropriate notice is provided and at a reasonable time in the performance period. Variations that seek to deny an employee a payment they have already earned is likely to result in breach of contract claims, such as the one in this case.

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