Bonus schemes: When a cap comes too late – lessons from the EAT

The Employment Appeal Tribunal (EAT) decision in Chandrashekarappa v Wipro Limited is a reminder to employers of ensuring that the rules of bonus schemes are clear.

The Claimant in this case was shown a slide deck which stated that there would be a bonus of up to 1% of revenues from “new logo invoicing against first 12 months... based on [Sector Lead] approval”. The start of the slide deck contained a disclaimer which said "This document serves to provide a broad overview and support an oral presentation. It is not a substitute for the policy document and cannot be considered complete or accurate without reference to the policy document. The presentation is only for information. The final policy document will overrule this presentation in the event of conflict."

Due to his completion of a particular high value sale, the Claimant’s manager wrote to the Sector Lead stating:

“I would like to propose [the Claimant's] name for the 1% commission on the JLP deal. This needs your approval as per the policy below. As you know, he has contributed significantly towards this win and deserves this. Requests your approvals Pls see policy below in the highlight”

The Sector Lead replied “I am ok. Go ahead” and HR were informed. HR were asked to draft a congratulations email to the Claimant, which they did. Their draft email included reference to a cap of USD150,000 and the need for approval from a manager above the Sector Lead.

When the bonus was paid, it was capped at USD150,000, whereas the full 1% was in excess of £500,000.

The Claimant made a claim for unlawful deduction of wages, which was rejected by the Employment Tribunal on the basis that it was a discretionary bonus scheme and the employer was entitled to apply a cap.

The EAT disagreed and upheld the claim.

The EAT found that once the Sector Lead had exercised his discretion to approve the 1% bonus, an entitlement to the bonus had arisen and there was no entitlement then to add other parameters.

This case is an important reminder of the importance of clear wording, proper approval processes and consistent methods of communication in the design and administration of bonus schemes.