Variation on a bonus

The Employment Appeal Tribunal (EAT) has held in Bluestones Medical Recruitment Ltd v Swinnerton that it is necessary for tribunals to carry out a detailed assessment and make clear findings of fact when deciding whether a discretionary bonus has been varied by custom and practice to become a contractual entitlement. Guidance on making the assessment is set out in Park Cakes Ltd v Shumba.

Basic facts

When Mr Swinnerton first joined Bluestones, he worked as a medical recruitment consultant, meaning he was entitled to a non-contractual discretionary bonus.

In April 2015, he was promoted to the role of general manager at which point it was agreed that he should be paid 6.5 per cent of the company’s profits on a quarterly basis. Although the company intended to make him a shareholder in the longer term, it proposed in the interim that he should be paid the sum as a dividend.

However, as this was not possible until he actually became a shareholder, it was then proposed that he should be paid the percentage as a discretionary bonus, subject to PAYE deductions. As Mr Swinnerton did not want this arrangement, it was agreed that the payment should be processed as a director’s loan which would be repaid from dividends when he became a shareholder.

Before that happened, however, he was dismissed at the end of May 2017 for gross misconduct. Mr Swinnerton claimed that he was owed bonuses for April and May 2017 which amounted to an unauthorised deduction of wages.

Relevant law

Section 27(1) of the Employment Rights Act (ERA) states that “wages” includes any sums payable to the worker “under his [sic] contract or otherwise”.

Section 27(2)(a) states, however, that this excludes payments “by way of an advance under an agreement for a loan”.

Tribunal decision

Although the tribunal acknowledged that provision had only been made for a non-contractual discretionary bonus, it held that it had become custom and practice for Mr Swinnerton to be paid a quarterly bonus once he was promoted to general manager in April 2015.

As such, he was entitled to receive 6.5 per cent of the company’s operating profits for the period from 1 April to 26 May 2017 when his employment was terminated. The company therefore owed him almost £4,700.

Bluestones appealed, arguing that the payments remained discretionary under the terms of Mr Swinnerton’s contract and there was therefore no basis on which the tribunal could have found an agreed variation to that contract through custom and practice.

EAT decision

And the EAT agreed that it was impossible to ascertain how the tribunal had come to the conclusion that Mr Swinnerton was entitled to the payments.

Not only had it failed to make the necessary findings of fact, it had also failed to carry out the requisite assessment to support its decision that an entitlement had arisen from custom and practice. The guidance on making the assessment (set out in Park Cakes Ltd v Shumba), says that potentially relevant considerations will typically include:

• The number of occasions, and over how long the benefits in question have been paid
• Whether the benefits were always the same
• The extent to which those benefits have generally been publicised
• How the terms are described
• What is said in the express (written) contract, and
• Equivocalness (how open the term is to interpretation that it is discretionary rather than contractual).

Likewise, it had not made a finding as to the nature of any agreement reached in April 2015 that had varied the previous discretionary nature of his bonus entitlement. This was necessary in order to determine whether the payments made were in fact loans and therefore excluded by subsection 27(2)(a) ERA.

It therefore remitted the matter to be reconsidered by a freshly constituted tribunal.