Employers beware - Changes to discretionary bonus structure can cost you!

Overview

The Supreme Court of Victoria has awarded a senior accountant over $420,000 in damages for the repudiation of his employment contract by accountancy firm, Crowe Horwath Australia.


Contents

The Supreme Court of Victoria has awarded a senior accountant over $420,000 in damages for the repudiation of his employment contract by accountancy firm, Crowe Horwath Australia.

Mr Loone was employed as a long standing senior employee at Crowe Horwath. He was the Managing Principle of its Launceston office from 2012 until his employment ended in July 2016.

The Court held that Crowe Horwath repudiated Mr Loone’s employment contract when it made changes to a bonus payment scheme and his role within the firm.

Repudiation occurs when the conduct of a party to a contract demonstrates that it no longer intends to be bound by, or to perform, the terms of the contract. The conduct of Crowe Horwath in this matter which amounted to repudiation is analysed in more detail below.

Changes to bonus scheme
Mr Loone’s contract stated:

"The bonus you may be eligible to get forms a discretionary component of your Remuneration. The Company will determine from time to time, at its absolute discretion, the amount of any bonus payment that may be made to you. This amount will be determined by consideration of various performance parameters including but not limited to your personal performance, the performance of the Group and the broader economic conditions".

Crowe Horwath engaged in repudiatory conduct by:

  1. Excluding the profitability flowing from the acquisition of another accountancy firm that Mr Loone had facilitated from the calculation of the bonus pool, which had significant adverse impact on the quantum of his bonus.
    While the contract gave Crowe Horwath an absolute discretion as to the quantum of any bonus payment to be made to Mr Loone, the exercise of that discretion was subject to the obligation that it consider the criteria prescribed. Crowe Horwath’s refusal to comply with the mandatory criteria prescribed amounted to the repudiation of a fundamental obligation under the contract.
  2. Withholding 20% of the annual bonus payments for a period of 3 years as part of a new deferred incentive model.
    Although the employment contract conferred upon Crowe Horwath a discretion to determine the amount of any bonus payment, once the amount was determined, Crowe Horwath was obliged to pay that amount in full during the relevant bonus year. Its refusal to do so also amounted to the repudiation of a fundamental obligation under the contract.

Changes to role and responsibilities
Prior to mid-2015, Mr Loone had full autonomy in the running of the Launceston office. However, as part of an initiative to provide clients with a holistic suite of services by fostering more collaboration and teamwork across different parts of the business, a number of changes were made from late 2015 that significantly reduced Mr Loone’s responsibilities. These included requiring all expenditure to be authorised, removing Mr Loone’s oversight of marketing and finance, and removing Mr Loone’s authority to recruit, develop and terminate staff.

The Court held that these changes involved a significant erosion of Mr Loone’s management responsibilities which amounted to repudiation of the contract.

Consequences of repudiation
Mr Loone was awarded 12 months pay and superannuation (over $280,00) and a bonus payment (over $140,000) that he would have received if not for the repudiation. 

In addition, as a consequence of Crowe Horwath’s repudiation of the employment contract, the restraint of trade set out in Mr Loone’s contract was found to be unenforceable, meaning that Mr Loone was free to set up his own accountancy firm and offer its services to clients whom he advised while employed at Crowe Horwath.

To read the entire decision, click here: Crowe Horwath (Aust) Pty Ltd v Loone (No 3) [2017] VSC 548 (15 September 2017).

What does this mean for employers?
This case highlights the importance of employers ensuring that the contractual terms relating to bonus payments and other benefits are carefully worded.  For existing employees, before considering implementing substantial changes to duties or bonus schemes, employers should carefully consider the applicable contractual obligations to ensure they do not inadvertently breach the contract.

The cost of failing to do this may result in your organisation losing good performers, substantial awards of damages and being unable to prevent an employee from engaging in direct competition with you. 

Employers should:

  • review their contract terms relating to bonuses to ensure that full discretion is achieved; and
  • seek advice before implementing changes to bonus schemes or making changes to employees’ roles to minimise the risk of unintended repudiation of the contract.
Contact Information
Renae Harding
Partner at Jackson McDonald
rharding@jacmac.com.au


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