Variable income: employers should be wary of how they treat bonuses

April 12, 2021

Employers should take all appropriate precautions to avoid the bonus paid to an employee being construed as being part of his/her contractual remuneration. Should the bonus be considered as being part of the employment contract, the employee would be entitled to claim the payment of such bonus each year.

A recent decision of the French Supreme Court adds very useful clarifications in this respect.

  • In this case, an employer believed they had taken appropriate precautions to ensure that the bonus paid to a top manager remained discretionary:
    No reference was made to the bonus in the employment contract.
  • The conditions for granting the bonus were unilaterally defined in a separate document, which explicitly stated that it was not part of the employment contract.
  • The amount of the bonus was unilaterally determined by the employer.

Despite all these precautions, the employee, who had received a bonus each year between 2000 and 2011, claimed the payment of a bonus for 2012 and 2013.

In a decision of 10 March 2021, the French Supreme Court confirmed the decision issued by a court of appeal, which had maintained that the bonus was contractual and subjected the employer to the payment of such bonus for 2012 and 2013.

The Supreme Court based its decision on a body of evidence which proved the parties’ intention to contractualize the bonus, namely:

  • The employee had been informed each year of the amount of bonus payment he could obtain with respect to the year under way.
  • The bonus’ amount was not discretionary but determined based on criteria defined by the employer and communicated to the employee.
  • The bonus had been paid each year for 12 years.

In light of this, employers should consider what can be done to help mitigate this risk. 

The main lesson to be drawn from this decision is that, in order to ensure that the bonus remains discretionary, the employer should refrain from communicating the criteria behind the decision to grant a bonus, and should also change those criteria from year to year to avoid the employee identifying them and being able to demonstrate a pattern.

This recommendation does not prevent the employer from setting
performance goals, which would be used to evaluate the proper performance of the employment contract and allow the employee’s career progression, but would not be used to calculate the bonus.

This decision offers useful guidance when it comes to drafting bonus plans and performance goals.

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