Bonuses can form a significant component of remuneration packages for employees. Often, those bonuses are expressed to be paid at the employer's discretion. In the case of Leiman, Ricardo and another v Noble Resources Ltd and another [2018] SGHC 166, the Singapore High Court provided helpful guidance on the obligations of an employer in the award of a discretionary bonus.
Background
The case concerned a claim by Ricardo Leiman (Mr Leiman) for, amongst other things, a discretionary bonus allegedly owed to him by his employer Noble Resources Ltd (NRL). Mr Leiman was employed by NRL to serve as COO and subsequently CEO of Noble Group Limited (NGL). Both NRL and NGL are part of the Noble Group of companies.
The variable components of Mr Leiman's remuneration, including his discretionary bonus, were determined by NGL's Remuneration and Options Committee (Committee), and were to be awarded in the Committee's absolute discretion.
Following a breakdown in the relationship between Mr Leiman and the leadership of the Noble Group, Mr Leiman agreed to terminate his employment with NRL on 1 December 2011. A settlement agreement was entered into which pertinently provided that Mr Leiman would be entitled to be considered for a 2011 discretionary bonus to be paid out in April 2012 (2011 Bonus). The settlement agreement also imposed non-competition and non-solicitation obligations on Mr Leiman.
In the meantime, the Noble Group hired a private investigator to find out whether Mr Leiman was attempting to set up a competing business. It was discovered that Mr Leiman had met numerous current and former employees of the Noble Group in the period around his termination and had been speaking to one of the Noble Group's business and strategic partners with a view to setting up a competing business.
The Noble Group also instructed an external corporate crime consultant to investigate Mr Leiman's recruitment of two of his former associates to the Noble Group. It was discovered that Mr Leiman knew that the two associates had previously been involved in fraud, conspiracy, and racketeering and had no prior experience in the roles for which they were recruited.
Citing the outcome of the foregoing investigations, as well as the Noble Group's poor financial performance at the relevant time, the Committee declined to award Mr Leiman the 2011 Bonus.
This led to Mr Leiman commencing proceedings to claim for, amongst other things, a declaration that he be considered for and be paid the 2011 Bonus.
Court's decision
The Court found that the Committee was justified in not awarding the 2011 Bonus. The Committee had shown that it had considered the issue of the 2011 Bonus but declined to award it due to Mr Leiman's misdeeds and the Noble Group's poor financial performance at that time.
The Court made the following useful observations:
- Unless a bonus is found on a true construction of the contract to be guaranteed, an employee is not legally entitled to a bonus, the granting and quantum of which are entirely at the discretion of the employer;
- Where the employment contract confers on the employer a discretion to award a bonus, the employee is entitled, at the very least, to be considered for such an award;
- In considering an award of a bonus, the employer must act rationally and in good faith. This obligation applies both to the decision of whether to award a bonus and the quantum (if any) of such bonus; and
- In determining whether an employer had acted rationally and in good faith, the courts will not overturn a decision merely because it disagrees with the outcome reached or the reasons cited by the employer in support of the outcome.
Comment
While the courts will give due deference to the employer's decision regarding a discretionary bonus, the employer should not take this as a licence not to act rationally and in good faith. There is case law across the common law world to the effect that an employer cannot act capriciously when exercising its discretion, particularly with respect to decisions regarding the payment of bonuses.
At the outset, it is important for the employer to be able to show that it had actually considered whether to award a discretionary bonus. The employer will be in breach of contract if it is found not to have even considered the issue. In that case, the court may, for the purpose of awarding damages, put itself in the employer's shoes and consider the employee's possible entitlement to a bonus.
At all steps of the decision making process, it is good practice for the employer to make written records of the reasons for its decision. In the event of dispute, such records will be useful to show that the employer had in fact considered the issue of the discretionary bonus rationally and in good faith.
While the obligation to act rationally and in good faith is not unduly onerous, the employer should ensure that the reasons in support of its decision can withstand scrutiny. While the courts will not undertake heavy scrutiny, reasons which can be said to be perverse, incredible, discriminatory or irrational bear a high risk and should be avoided.
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