Employment and Industrial Relations Law

The Enforceability of PERFORMANCE BONUS Clauses Post Termination

10 Sep 2021

8 min read

Author: Ann Bugeja

Performance Bonus

A performance bonus is an ‘extra’ form of compensation which is granted by an employer to an employee, as a reward for reaching a certain pre-established goal or benchmark. The idea of awarding a performance bonus once a particular target is reached, is becoming increasingly popular among employers in Malta.

Performance bonuses are discretionary in nature, meaning that it is up to the employer to decide whether to award such bonus or not. In fact, our law explicitly excludes performance bonuses from the definition of ‘wages’, as defined under Article 2 of the Employment and Industrial Relations Act (‘EIRA’), Chapter 452 of the Laws of Malta, where:

““wages” means remuneration or earnings, payable by an employer to an employee and includes any bonus payable … other than any bonus or allowance related to performance or production”.

In this article, we will examine two judgements, the results of which are conflicting, but which both revolve around the payment of a performance bonus after the termination of one’s employment.

Joanne Azzopardi vs Mapfre MSV Life p.l.c.

In a recent case of Joanne Azzopardi vs Mapfre MSV Life p.l.c.,[1] Ms Azzopardi had been employed with the company ‘Mapfre MSV Life’ since September 1999. She resigned in January 2018, where she continued working during her 3-month notice period.

The performance bonus in question was regulated by a Performance Management System Policy (‘PMS Policy’) which was signed by the parties. This policy explicitly stated that ‘the moment employees submit their resignation to terminate their work with Mapfre MSV, they will not be entitled to any outstanding reward bonus’.

The employee, Ms Azzopardi, confirmed that upon her engagement, she signed both her employment contract, as well as the above-mentioned PMS Policy. Thus, the Court concluded that Ms Azzopardi was aware of the criteria that one had to satisfy in order to be eligible for such bonus, as well as being aware of the procedure involved in acquiring such bonus.

Effectively, the dispute was resolved on the basis of the applicability and interpretation of this PMS Policy. In this particular case, the Plaintiff, although having worked the entire calendar year on the basis of which her performance appraisal was to be made, she actually resigned in the following year, but before the process leading to the payment of this bonus had been completed.

The Court considered that it is true that as far as the payment of a performance bonus is concerned, the principal, in this case the defendant company, has discretion when it comes to awarding such bonus. However, although there is an element of discretion on the part of the principal, once the payment of the bonus had been stipulated in a document (the PMS Policy) which was duly accepted by both parties, the Court considered that there was also a contractual link which had been created and therefore, the payment of the bonus couldn’t be left to the absolute discretion of the defendant company. Furthermore, it was considered that the exercise of discretion in the payment of the performance bonus was fully embraced by the Court.

In its judgement, the Court also made reference to Article 1056 (1) of the Civil Code, Chapter 16 of the Laws of Malta, which states that:

“Where an obligation is contracted on a condition which makes the obligation depend solely upon the will of the obligor, the obligation is null”.

From all this, the Court considered that there was no doubt that the action which was involved wasex contractu’ (arising from a contract), based on a clause in the section dealing with “Eligibility” in the PMS Policy. It was also evident that the parties were bound by the long-standing legal principle of ‘pacta sunt servanda’, the Latin phrase meaning that ‘agreements must be kept’. In the Maltese legal system, this principle is incorporated in Article 992 of the Civil Code, which reads as follows:

“(1) Contracts made in accordance with the law have the force of law for those who have made them;

(2) Such contracts may not be revoked except with the mutual consent of the parties, or for reasons known to the law”.

The Court also referred to the principle of good faith. This concept requires that the terms that have been agreed upon between the parties, must be respected and honoured.

Indeed, when reading the above-mentioned clause of the PMS Policy, it is evident that the aim of such performance bonus is for the company to show its appreciation towards its employees, by giving them a ‘variable remuneration’, that is, a right to the payment of a performance bonus upon meeting the performance targets which were agreed upon between the employees and the company. Ultimately, this aims at incentivising the employees by increasing their motivation levels which will in turn, increase employee loyalty and productivity. However, it is just as clear from the clause that the bonus will no longer be due if the employee resigns before its payment is actually made.

Ms Azzopardi went on to argue that the clause in the PMS Policy was not clear (particularly in terms of which year it would be applicable to) and that therefore, it would not be applicable in her case. In this respect, the Court referred to Article 1004 of the Civil Code, which states that where a clause may have 2 different meanings, it shall be understood to mean that thing by which there may be some effect, rather than that by which there cannot be an effect. From the wording of the above-mentioned clause of the PMS Policy, it was also concluded that the clause did not relate to any particular year or class of employees.

It follows therefore, that in the absence of any other qualification, this clause shall mean that it will apply to deprive each employee of the right to the payment of the performance bonus, without reservation, upon the submission of their resignation and before the payment of the performance bonus.

The Court understood that the employee was fully aware of the consequences of her resignation and saw nothing illogical in the application of the PMS Policy because after all, this Policy was introduced by Mapfre MSV Life for the mutual benefit of both parties, but with loyalty requirements towards the same Company, which loyalty is obviously nullified in the case of resignation.

Accordingly, the Court concluded that since the defendant company considered that as part of its Policy on eligibility for a performance bonus, an employee who resigns before this bonus is assessed and paid, is no longer entitled to this bonus because they have not remained loyal to the company, the discretion, which was expressed and defined in the relative Policy, and which was accepted by Ms Azzopardi (and which is not against the law or public order), shall be enjoyed by the Company. Therefore, the Court concluded that the clause in the PMS Policy was to be upheld, and thus, Ms Azzopardi was not entitled to the payment of such performance bonus.

Ian Falzon vs L-Awtorita’ tat-Trasport f’Malta

In another case, that of Ian Falzon vs L-Awtorita’ tat-Trasport f’Malta[2], the issue related to the paying-out of a bonus pertaining to the year 2013. The Plaintiff, Mr. Falzon, held the position of Director of Civil Aviation within Transport Malta.  He sued the latter for the sum of €9,900 which was owed to him as a performance bonus relating to the period between January and December 2013. Mr Falzon’s claim arose out of a clause in his employment contract which stated that the employee shall be entitled to up to 15% of the gross annual salary as an annual performance bonus. In fact, the Authority had conceded that 10% of the bonus should be paid to Mr Falzon, whilst a discussion should be held in order to ascertain whether the remaining percentage of the bonus was to be paid or not. At first instance, the Industrial Tribunal decided that the employee, Mr. Falzon, was terminated in a just and fair manner.

The Court of Appeal noted that the Authority had taken the decision to pay 10% of the performance bonus, and a meeting had been scheduled to conduct an appraisal on the employee’s performance in order to ascertain whether the remaining 5% was to be paid. However, such meeting was cancelled once certain criminal charges were filed against the Plaintiff relating to misappropriation, fraud, and embezzlement, and thus it was never ascertained whether he was to receive the remaining 5% or not. The Court of Appeal held that the charges filed against the Plaintiff were in relation to a previous employment, and that the Authority was bound to assess the Plaintiff’s performance only in relation to the year for which the outstanding bonus was to be paid. The Court relied on the principle of equity and decided that 12.5% of the performance bonus was to be paid.

Concluding Remarks

In conclusion, it is evident that the Maltese Courts have made it clear that discretionary bonuses arising out of contractual obligations and which do not result from the Employment and Industrial Relations Act, must be paid only if the conditions established within the particular contract are satisfied, and that a case-by-case analysis will need to be carried out.

It is also pertinent to point out that the wording of the employment contract and/ or policies is key when it comes to the enforceability of a performance bonus clause.

[1] Decided on the 16th of December 2020 by the Court of Appeal, presided by Judge L. Mintoff;

[2] Decided on the 11th of February 2019 by the Court of Appeal, presided by Judge A. Ellul.