Discretionary bonus — no obligation, right? When a promised bonus becomes law

"Discretionary" doesn't mean "whenever we feel like it"

Bonus and incentive schemes are almost always described as discretionary. Employers use that word deliberately, hoping it gives them an unqualified right to withhold payment whenever it suits them. In reality, Australian courts have consistently held that calling a bonus "discretionary" does not hand an employer unlimited power to refuse to pay it.

What "discretionary" is actually meant to allow

A genuinely discretionary bonus scheme typically gives an employer some room to make a judgment call — how big a bonus pool is, whether to run the scheme at all in a given year, or how to weigh subjective factors like teamwork or conduct. What it doesn't do is give an employer a free pass to ignore its own scheme once an employee has done what was asked of them.

Where employers get it wrong

Courts have found that an employer cannot exercise a contractual discretion capriciously, arbitrarily, irrationally or unreasonably — even where the contract uses broad language like "entirely within the discretion of" the company. This is reinforced by an implied term in every employment contract that both sides will act in good faith. Where a bonus scheme sets clear, objective targets and an employee meets them, an employer generally can't simply decide, after the fact, not to pay — particularly if the scheme was marketed to staff as a genuine reward for hitting those targets.

Courts have specifically criticised the practice of an employer introducing an incentive program, promoting it as rewarding strong performance, and then invoking "discretion" only once an employee has actually earned the reward. That pattern has been found to defeat the entire commercial purpose of having the scheme in the first place.

A case that tested this: Hewlett Packard Australia Pty Ltd v Subasic

This isn't just theory. In Hewlett Packard Australia Pty Ltd v Subasic [2021] ACTCA 3, a sales executive achieved around 500% of her sales target under HP's incentive program, which entitled her to a commission payment of roughly $446,000. HP refused to pay that amount, instead relying on a "discretion" it said allowed it to retrospectively cap the payment — offering her a fraction of what the program's own formula produced.

Both the trial judge and the ACT Court of Appeal rejected HP's position. The program's terms were detailed and specific about how commission was calculated, which was inconsistent with HP also holding an unstated, general power to cap payments after the fact. Even if such a discretion existed, exercising it that way — after the employee had already earned the payment under the scheme's own rules — breached the implied obligation to act in good faith. The case is a clear example of employment policies and incentive schemes being treated as contractually binding, not just internal guidelines an employer can override at will.

When a bonus becomes a real entitlement

A promised bonus is more likely to be enforceable where:

• the scheme set out clear, objective, measurable targets;
• you met those targets, or were told that you had;
• the bonus was presented as a reward tied to performance, rather than a purely discretionary gift; and
• the refusal to pay came only after the targets were achieved, rather than before the scheme began.

The more subjective and open-ended the scheme, and the earlier any limits were made clear to you, the more genuine discretion an employer is likely to have. But even then, that discretion still has to be exercised honestly and reasonably — not used as an excuse to avoid paying out.

What to do if a bonus has been withheld

Start by reading the actual wording of your bonus clause or scheme documents — not just what you were verbally told. Keep copies of any communications that set out targets, confirmed you'd met them, or described how the scheme would work. If a bonus you were led to expect has been withheld after you did what was asked, it's worth having the clause and the circumstances reviewed before accepting your employer's explanation at face value.

This article is general information only and does not constitute legal advice. Whether a specific bonus is enforceable depends on the exact wording of your contract and scheme documents — speak with one of our employment lawyers about your situation.

← Back to Employment Law Explained