Many employers have a bonus scheme in place under which an employee is awarded an annual bonus depending on the results achieved by the employee, but with a discretionary power for the employer to award or moderate the bonus. If the employer has such a discretionary power, the question arises to what extent it may actually exercise that power.

Good employment practice

Lower courts have repeatedly held that a discretionary power to grant or mitigate a bonus is limited by the requirements of good employment practice. A recent Supreme Court judgment also confirmed that this issue is subject to good employment practice in accordance with Article 7:611 of the Dutch Civil Code. That article provides that good employment practice means, among other things, that it must be clear to an employee on the basis of what criteria or on the basis of what circumstances that might support the decision to cut a bonus it has been decided not to pay a bonus, or to pay it only in part, and that the employer must properly substantiate that decision. An employer therefore does not have carte blanche to exercise its discretionary power in the manner it sees fit, but is required to make such a bonus decision with due care (the principle of due care) while stating the reasons (the duty to state reasons).

These requirements were not met in the case at hand. No pre-established criteria applied and no circumstances to support the decision to cut the bonus, nor had the employer provided a proper justification for moderating the bonus to 40%. The employer therefore lost the case and had to pay its employee the full bonus after all, namely USD 113,791.54.

Full assessment

Finally, the question whether an employer has observed good employment practice is assessed to its fullest extent by the court, although it may take all the circumstances of the case and the employer’s discretion into account.

Advice

If you, as an employer, grant a discretionary bonus, you should make sure to observe the requirements of good employment practice when refusing or moderating that bonus. In other words, act with due care and provide a proper justification for the decision. Finally, if you award a bonus to your employee, you are well-advised to confirm in writing to your employee that this awarded bonus does not confer any future entitlement.

Please contact our employment law specialists if you have any questions or require any advice on your bonus scheme (discretionary or other).

This article was published in the Newsletter Vestius of June 2023