EAT finds employer could not impose bonus cap after entitlement had crystallised

Background

In the case of Chandrashekarappa v Wipro Ltd, the claimant worked in a sales role and participated in an incentive arrangement known as a "kitty bonus". Employees were informed that they could receive up to 1% of invoiced revenue generated from new business, subject to approval by the relevant sector lead.

The claimant played a significant role in securing a major contract with the John Lewis Partnership (JLP). Shortly afterwards, his line manager sought approval for payment of the bonus and the relevant sector lead approved the request.

Several weeks later, however, the employer began suggesting that additional approval was required from more senior management. At the same time, it introduced a cap of $150,000 on the payment. The Tribunal found that this was the first time the cap had been mentioned and that there was no evidence that it had formed part of the original arrangements communicated to employees.

The claimant was eventually paid the capped amount rather than 1% of the first year's revenues from the contract, which would have been £516,082. He brought a claim for unlawful deductions from wages, arguing that he was entitled to the full amount.

Tribunal decision

The Employment Tribunal dismissed the claim. Although it accepted that the cap and additional approval requirements emerged after the original approval had been given, it concluded that the claimant's entitlement had not crystallised at that stage. In the Tribunal's view, no legal entitlement arose until the employer formally communicated the bonus award in December 2020. By that point, the employer had decided to apply the $150,000 cap and therefore there had been no unlawful deduction.

EAT decision

The claimant appealed to the EAT, and the EAT allowed the appeal.
It held that the Employment Tribunal had focused on the wrong question by concentrating on the later suggestion that further approval was required. Instead, it should have considered whether the claimant had already become entitled to the bonus under the terms originally communicated to him.

The EAT concluded that the original scheme required only two things: a qualifying deal and approval from the sector lead. Once those conditions had been satisfied, the claimant acquired an entitlement to receive 1% of the relevant revenues, even though the precise amount could not yet be calculated.

The employer was not entitled to "move the goalposts" by subsequently introducing additional approval requirements or applying a cap that had never previously been disclosed. The claimant's entitlement had already crystallised before those restrictions were introduced.

Learning points

This decision highlights the importance of clearly documenting all bonus scheme conditions at the outset. Employers should ensure that any caps, thresholds, approval requirements or other limitations are communicated before employees begin working towards the relevant incentive.

The case also demonstrates that discretionary bonus arrangements do not necessarily remain discretionary indefinitely. Once the conditions communicated to employees have been satisfied and the relevant decision-maker has exercised their discretion, an entitlement may crystallise. Employers who attempt to introduce new restrictions after that point risk finding that they are unable to rely on them.

For more information please contact Sofia Efstathiou in our Employment team.