UK: Bonus Discretion: When has Entitlement “Crystallised”?
Authors: Charles Urquhart and Charlotte Stern
This recent case illustrates the importance of having clearly defined parameters for performance related pay.
Mr Chandrashekarappa worked in a sales role at Wipro and attended an internal presentation announcing a discretionary “kitty bonus” of up to 1% of revenues from new business, subject to approval from the relevant sector lead. He secured a major contract and the sector lead approved a proposal that he receive the full 1% bonus.
Several weeks after that approval, a different senior manager introduced additional bonus requirements for the bonus scheme: executive sign‑off and a cap of $150,000. In December 2020, Wipro told Mr Chandrashekarappa that his bonus would be subject to that cap. He argued that he was entitled to the full 1% on first‑year revenues, which exceeded £500,000 and he brought a claim for unlawful deduction from wages in the Employment Tribunal.
The Tribunal dismissed his claim, accepting his employer’s argument that the sector lead’s approval did not result in a legally binding entitlement and that this only arose after the introduction of the bonus cap and additional approval requirements.
Mr Chandrashekarappa appealed to the Employment Appeal Tribunal (EAT), which agreed with him, finding that there had been an unlawful deduction from his wages. Instead, the EAT concluded that Mr Chandrashekarappa’s bonus entitlement was not subject to the additional approval requirements introduced from December 2020. On a proper analysis, Wipro had set out the terms of the bonus scheme at the outset, which Mr Chandrashekarappa had fulfilled and the sector lead had validly exercised his discretion to award the full bonus. At that point, Mr Chandrashekarappa’s entitlement had crystallised. It was not open to the employer to ‘move the goalposts’ by imposing new conditions or a cap that had not formed part of the scheme when the relevant decision was made.
Key Action Points for Human Resources and In-house Counsel
This case confirms that discretionary does not mean risk-free. Once discretion has been exercised in line with the scheme rules, a binding entitlement may arise. Employers cannot then retrospectively add caps or additional approval stages to reduce the payout.
The key is to get the scheme right from the outset and ensuring everyone involved understands the applicable conditions, limits and approval requirements. Senior management must also be clear that their decisions may create enforceable rights.
