Discretion not a safe harbour in employee context – Small v The Boots Co PLC.

In Small v The Boots Co PLC (23 January 2009), Mrs Justice Slade carefully laid out the way tribunals and courts should go about this assessment. While the results in this case were uncertain – as the judge sent the case back for rehearing – her analysis could well fatally undermine many employers’ claims to be able to change or cancel benefits or practices as they see fit, without employees having any legal remedies.

Two clear principles are laid out by the judge in the Small case, which concerned a cash bonus scheme, but which are equally applicable to employee share schemes and other employee benefits.

1) The use of the word “discretionary” by the employer in documentation about the benefit or practice does not decide the issue at all.

Rather, a careful evaluation is required to decide whether and if so to what extent the benefit or practice has any contractual effect.

In this particular case, the judge held that “discretion” might apply to the provision of an overarching bonus scheme, to a decision each year to operate the scheme, to the method of calculation of bonus, to the threshold which triggers a bonus, or to what percentage of salary will be paid and there could be wider (or even no) discretion in some areas compared with others.

2) That evaluation must take into account all the relevant circumstances in deciding whether the discretion in the bonus scheme documentation was subject to contractual obligations to the employees. In this particular case, that included Boots’ invariable practice of paying a bonus every year for some 40 years.

The judge also noted that it was clear from well established authority that any discretion, which the employer may have, after the forensic analysis above has been completed, must be exercised rationally and in good faith (Court of Appeal in Horkulak v Cantor Fitzgerald International).

So, there are lessons to be drawn:

1) In drawing up new schemes, employers need to take great care when drafting the documentation and explaining them to employees. Careless drafting will in practice work in favour of employees having contractual rights.

2) Before cancelling or changing any existing schemes, employers need carefully and objectively to analyse the terms and effect of schemes. That should enable them to determine the proper process to follow to make sure the change or cancellation is done in the legally correct manner.