Enforceability of performance bonus payout terms post termination in India
For many of us, bonuses make a significant portion of our salary but these performance-linked bonuses are not required by law. This gives employers broad discretion in how they want to construct and implement their incentive compensation plans and policies. Usually, these incentives are tied to the performance of the employee like successful completion of certain tasks or achieving certain measurable performance metrics or benchmarks and is earned as of a certain date which can be at the end of each year, each quarter, or any other set intervals.
These performance-based pay structures encourage employees to work harder while keeping them aligned to the goals of the organisation, but employers often fail to track employee’s performance, communicate the assessment in regular intervals as well as maintain paper trail to back up their assessment. In the case of Vijay Kumar Vs. M/s. Doka India Pvt. Ltd., an employee resigned from the organisation due to personal reasons. The employer accepted the resignation with immediate effect and waived the requirement of notice period of 3 months. This employee filed the case against the employer demanding salary for the notice period and the annual performance bonus computed to even include 3 months’ notice period. The employer argued that the performance bonus was subject to achieving mutually agreed targets for the relevant year and the performance of the employee was below satisfactory level but failed to produce any evidence to prove the same in the Court. It was also revealed during the cross examination that the performance bonus was part of the CTC of that employee and that all the employees were entitled to a bonus. Consequently, the Court held that the employee was entitled to the performance bonus but not for the period beyond his tenure.
However, in cases where the employers were able to prove performance of the employee being unsatisfactory, the Courts in India have denied the payment of performance-linked bonus/incentives offered to the employee under the appointment letter [Vivek Garg vs M/s. Fontus Water Limited].
It is also seen as a common practice that many employers unilaterally fix the date of the assessment of the employee’s performance as well as pay-out of the bonuses to be much after the period to which the bonus was linked. While there is nothing wrong legally in structuring the bonus pay-out in such a manner but, if an employer fails or refuses to pay the employee his or her agreed upon bonus at the time of termination despite the employee having earned it by satisfying all set requirement and preconditions, then in all likelihood that employee has a recourse and may pursue legal action against his or her employer for that earned but unpaid compensation. In the case of Mr. Nilesh Shastri vs Payjo India Pvt. Ltd, the performance linked variable bonus was agreed to be paid quarterly based on performance and yearly review. The employee resigned from the organisation after working only for a period of 3 months i.e. one quarter of the year. The Court decided in favour of the employee and directed the employer to pay the variable bonus for these three months.
It is observed that the Courts in India take into consideration various factors on a case-to-case basis and do not necessarily apply a general principle in order to determine whether there is any post-termination/resignation entitlement to payment. Some of these factors include but are not limited to whether the bonus or benefit is an ‘integral’ part of the employees’ total compensation; or does the contract explicitly limit entitlement to a bonus or other incentive compensation post-termination.
Hence, employees should not assume that if they are no longer employed with the organisation as of the date of the pay-out of the bonus, the employer does not have to pay it. And it is advisable that the employers carefully draft the terms of pay-out and forfeiture. For example, the terms of payment must specify what happens when an employee is terminated for cause; or whether the entitlement requires ongoing employment at the time of pay-out or continued employment as of the end of the relevant period.