The question

In our recent employment webinar, one of our guests asked this question:

“Can an employer claw back the discretionary bonus granted to employees in the previous years where (a) there is no claw back clause in their employment contracts and (b) there has not been any fault on the part of the employees?”

In this article, we will discuss the issues raised in this question.

What is discretionary bonus?

Broadly speaking, bonuses can be contractual and discretionary in nature. Contractual bonus is bonus which is of a contractual nature and payable by an employer if an employee meets certain performance targets or criteria in accordance with the employment contract. Discretionary bonus, on the other hand, is bonus which is of a gratuitous nature, and is payable only at the employer’s discretion.  

Exercise of discretion in granting discretionary bonus

However, the exercise of discretion in granting discretionary bonus is not without restrictions.

In Clark v Nomura International Plc. [2000] IRLR 766, an English case, the claimant employee was a senior proprietary trader in equities of the defendant employer. The employment contract provided that the employer “operates a discretionary bonus scheme, which is not guaranteed in any way, and is dependent upon individual performance”. Upon the employee’s dismissal, the employer did not pay the employee his bonus for a nine-month period prior to the termination of his employment, although he earned substantial profit for the employer during that period.

The English court held that the employer’s discretion was not unfettered, and must not be exercised capriciously. The employer should not exercise its discretion irrationally or perversely, that is, no reasonable employer would have exercised his discretion in this way. Upon examining the evidence, the court held that the employer had exercised its discretion perversely and irrationally as no rational employer would award a nil bonus to an employee which earned it a huge amount of profit.

The irrationality or perversity test laid down in Clark v Nomura International Plc. has been applied by the Hong Kong courts in subsequent cases, including Wong Huey Lan v Colgate-Palmolive (HK) Limited (HCLA 77/2001, unrep., 11 Mar 2022).

Wong Huey Lan v Colgate-Palmolive (HK) Limited

It is common for employers to tie payment of discretionary bonus to certain objective performance targets or criteria. When that happens, what may have started off as a discretionary bonus may no longer be purely discretionary since, after introducing the objective performance targets or criteria, the employer can only exercise its discretion subject to such performance targets or criteria.

In Wong Huey Lan, the employment contract provides for a “Local Employees Incentive Plan” (“LEIP”). The provisions of the LEIP stated that the “[m]anagement reserves [the] right to alter or withdraw this plan, if the business “health” of the subsidiary is in jeopardy.” It also provided that the award for each employee under the LEIP should be calculated based on the operating target performance level and objective rating of the employee, and set out the formula for the calculation. The claimant employee was laid off and dispute arose as to her entitlement under the LEIP. The defendant employer claimed that LEIP was a discretionary bonus and the employee was not entitled to payment.

The Court of First Instance held that whilst the operation of the LEIP called for certain judgment on the employer’s part, the employer did not have an unfettered discretion in the matter. The employer was contractually answerable to the employee with regard to the payment under the LEIP. It would be more accurate to describe the payment as a “contractual benefit”, the calculation of which involved some exercise of discretion on the part of the employer, rather than as a discretionary benefit pursuant to a contractual formula.

Can an employer claw back bonus which
 has already been paid to an employee?

In Pet Line Company Limited v Wong Wai Hei (黃惠熹) [2019] HKDC 227, the District Court held that plaintiff employer could not do so if there was no express or implied term in the employment contract which conferred the right on the employer to claw back bonus already paid to the defendant employee.

The employee worked as a salesperson. The employer had previously paid the employee discretionary bonuses on the basis of her attendance and punctuality. Later the employer found out that the employee had benefited herself by conducting sham transactions, such as double charging a customer’s credit card and utilizing a customer’s VIP discount for her own purchase. The employer sought the return of the bonuses paid to the employee on the ground that she was not entitled to these discretionary bonuses due to her dishonesty or wrongful conduct, and that if the employer had found out about the employee’s misconduct, it would have terminated her employment much earlier on and would not have paid the discretionary bonuses to her.

The District Court dismissed the employer’s claim for return of the bonuses already paid to the employee as there was no legal basis to do so. The employment contract contained no express clause which conferred such right on the employer. The employment contract provided that the payment of bonuses was dependent on the employee’s attendance and punctuality. As such, the bonuses were not paid on the basis of the employee’s alleged sham transactions. The Court held that the employer could not claw back the bonuses already paid to the employee.

Is there room for implied term?

In the absence of an express term for claw back of discretionary bonus, is there room for such implied term? In Pet Line, implied term was not pleaded by the employer and it was for the employer to spell out clearly the scope of any implied term. For instance, what kind of behaviour or conduct would justify the return of bonuses already paid? The Court commented that all these issues aside, that there was a high threshold for an implied term to arise as a matter of law. It was doubtful that an implied term to the effect that the employee ought to return the bonuses already paid on the facts of Pet Line case would arise.

Takeaway

In the absence of an express term, it is unlikely that an employer can claw back discretionary bonuses already paid to employees. If employers want to have the option to claw back bonuses paid to employees, such term should be incorporated in the employment contracts with provisions setting out clearly under what circumstances that the employer may do so.

As for implied term, it is well-known that there is a high threshold for an implied term to arise as a matter of law. That said, in Pet Line, whilst the District Court doubted an implied claw back term would arise on the facts of that case, the Court also commented that in the absence of any submissions on this point, it was not open to the Court to make any ruling. The issue of whether a claw back term may be implied was not argued.

The exercise of discretion of discretionary bonus is not always straightforward. Employers do not have an unfettered discretion. If, for example, the employment contract provides the discretionary bonus is to be tied to some operating targets and the employer decides not to set any operating target or set a wholly unrealistic target, that decision could be set aside by the court. If the employer does not assess the performance of an employee rationally, properly or in good faith, that assessment could be challenged and reviewed by the court. Likewise, if the employer withdraws the plan without proper basis, that decision could be void. When in doubt, employers and employees should seek legal advice.