Bonuses Increasingly Upheld By Employment Relations Authority

In the 2012 decision of Thompson v 88 C-Force Textile Industries Ltd [2012] NZERA Auckland 386, the employee Mr Thompson was successful in claiming unpaid bonus entitlements of $185,144.72 as well as holiday pay. The relevant bonus provision in the employment agreement provided that

“In addition to salary and entitlements, the employee shall be paid an annual bonus calculated at the rate of 2 percent of annual gross sales in excess of $2 million, such bonus to be paid monthly in arrears on the 5th day of the month following.”

The question was whether the bonus entitlement was to be paid on the employee’s own personal sales or on total company sales.

The Authority looked at extrinsic evidence which was capable of demonstrating objectively what meaning the words used in the bonus clause were intended to bear by the parties. From 1999 to 2001, Mr Thompson was paid based on total company sales. From 2001 to 2005, Mr Thompson was paid based on total company sales even though there were other sales representatives who contributed to total company sales.

In 2005, Mr Thompson’s remuneration was renegotiated. The parties agreed to a new employment agreement and this was signed. C-Force did not read the employment agreement. From 2005 until 2008, Mr Thompson was paid the bonus entitlement based on total company sales. C-Force claimed that these three years of bonus were paid by mistake. However, the Authority found that C-Force should have raised its concern with Mr Thompson much earlier given the sums involved. The Authority was unpersuaded that having the bonus based on total company sales would flout business common sense.

The bonus payments stopped in 2008. Mr Thompson argued that he did not raise it with C-Force because he thought he might lose his job. He viewed his unpaid bonuses as an accruing nest egg. Mr Thompson also claimed that the bonus should be paid pro-rata for 7 months until the date of termination based on redundancy. C-Force, however, was successful in arguing the bonus was annual because a pro-rata interpretation would be inconsistent with the words of the bonus clause.

C-Force also argued that Mr Thompson could not recover the bonus entitlement from 2008 until 2011 because he had failed to query the non-payment of his bonus. The Authority held that C-Force had not shown that the company had relied on Mr Thompson’s failure to raise the issue of non-payment or that this failure resulted in a detriment to C-Force. However, the Authority did not accept that interest was payable on the bonus in the circumstances.

The lesson for employers is that a bonus must be clear as to how it is to be objectively calculated. If exercising discretion, any employer must do so in good faith which should be verifiable objectively.

If you have any queries about bonuses, please call us on 0800 15 8000.