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Labelling a bonus as 'discretionary' doesn't mean it is absolutely discretionary

Labelling a bonus as 'discretionary' doesn't mean it is absolutely discretionary

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Gall Solicitors' Felda Yeung reminds that there is an implied duty for the employer to exercise such discretion reasonably, in good faith, in a matter that is not perverse, and that is contractually enforceable.

Background

It is common for Hong Kong employment agreements to describe a bonus as “discretionary” or “gratuitous’ in nature. The employer’s objective is to retain sole and absolute discretion to decide whether to award a bonus and if so, to decide the amount to be awarded. However, the line between discretionary and non-discretionary bonuses can be blurry. 

Hong Kong employers should be aware that simply labelling a bonus as discretionary is not absolute as the Court will look at the substance to determine whether the bonus is contractual or discretionary in nature.

Facts of the case

In the recent case of Kan Kin Tong v Man Leong Fire Services Ltd [2023] HKDC 515, the District Court held that a bonus labelled as a “discretionary bonus” was a contractual payment and was part of the employee’s remuneration under the employment agreement.

The Plaintiff, a fire services installation technician, was employed by the Defendant, a fire services installation contractor. After working for the Defendant for 11 years, the Plaintiff tendered a one-month notice of resignation and commenced business with his own company as a fire services installation contractor. 

The Plaintiff argued that he was entitled to a non-discretionary share of the net profit as this was part of his remuneration under the terms of his employment. In response, the Defendant argued that this payment was subject to its discretion and refused to pay as the Plaintiff had started a competing business.

On the facts, the Court in Kan Kin Tong found that despite the “discretionary” label in the bonus agreements, the bonus system was, in fact, a formulaic incentive payment scheme and was therefore contractual. The system was based on the amount of work done/income received; the so-called “discretionary bonus” label did not carry the ordinary meaning as it did not sit well with the factual matrix and past dealings.

It was also inconsistent with the Defendant’s own case that the objective of the payment scheme was to enable “employer/employee sharing 50-50 the fruits of hard work”. In addition, there was no non-compete clause which prevented the Plaintiff from leaving the Defendant and immediately starting his own business using his skills.

Employers – be aware

It should be noted that even if a bonus is discretionary, it does not mean that an employer can exercise the discretion without any constraints as there is an implied duty for the employer to exercise such discretion reasonably, in good faith, in a matter that is not perverse, and that is contractually enforceable.

Each case is fact specific, but employers should be cognisant that labelling a bonus discretionary is not definitive of it being discretionary. If a simple formulaic calculation of the bonus award is adopted, the employer may wish to incorporate additional safeguards in relation to how an employer may exercise its discretion in deciding whether to award a bonus.

Additional clauses can also be incorporated to address situations where a bonus has been awarded but the employee’s employment with the company ends before the bonus is paid and/or the bonus award is vested in the employee.

felda yeung gall aug 2023

Note to readers - This case is specific to Hong Kong, but the findings are meant to be relevant reading for employers across Asia, however this does not constitute any legal advice.


Lead image / Shutterstock

Photo / Provided (Author: Felda Yeung, Partner, Gall Solicitors)

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