Can employers exercise a discretionary power to amend bonus schemes?
Basic principle underlying the employer’s power to make amendments
A bonus or commission scheme is considered a term of employment, even if the scheme is not part of the employment contract itself. The basic principle is that an employer may not change terms of employment unilaterally. This is only different if the employer has such a compelling interest in a change that this reasonably outweighs the employee’s interest in maintaining the term of employment unchanged.
Discretion in bonus schemes
How does this rule compare with the provision commonly used in practice in bonus or commission schemes that the determination of the amount of the bonus is entirely at the employer’s discretion? Surely this seems at odds with the above principle that unilateral amendments may only be made under certain special circumstances. Or is such discretionary freedom of the employer contractually stipulated if it is included in the scheme and – as a result – does it form an integral part of the term of employment agreed?
Recent Dutch Supreme Court decision
The Dutch Supreme Court recently clarified this. The case involved a sales executive with whom a bonus scheme had been agreed which provided that the employer was free to award only a partial bonus. Given the results he had achieved and the applicable calculation rules of the bonus scheme, the employee was entitled to a bonus of USD 113,790 gross. However, invoking its discretionary power under the bonus scheme, the employer decided to pay out only 40% of the bonus.
Amsterdam Court of Appeal
The employee sought payment of the full bonus. According to the Amsterdam Court of Appeal, contractual discretion is not a licence for the employer to adjust the bonus downwards at will. The employer’s bonus decision must be assessed against the requirements of good employment practices. In any event, this means that it must be clear to the relevant employee in advance which criteria are used to decide whether or not a bonus will be paid out in full, and the employer must give proper reasons for such a decision. The Court of Appeal believed the employer had failed to do so in this matter.
Dutch Supreme Court
According to the employer, the Court of Appeal wrongly sat on the employer’s chair and deprived it of its contractually stipulated discretionary power. However, the Advocate General of the Dutch Supreme Court did not concur, as the Court of Appeal had not assessed whether it itself considered that the reduction applied was reasonable or whether a different percentage might have been more appropriate. The Court of Appeal had merely assessed whether the decision to moderate the bonus had been carefully reached and was properly reasoned, which the Court of Appeal found was not the case.
The Dutch Supreme Court agreed with the Advocate General and dismissed the employer’s complaints in cassation.
Although, in itself, it is still possible for an employer to incorporate some degree of discretion into a bonus or commission scheme, this discretion must be used in a transparent and reasonable way. This means that employers would do well to include in the bonus scheme, for example, which circumstances justify reliance on the discretionary power to moderate a bonus. Including a general discretionary power is in any event insufficient.