<p><strong>Management of bonuses</strong></p>
<p>Employment relationships in the United Arab  Emirates (&ldquo;UAE&rdquo;) are generally regulated by the UAE Federal Law No. 8 of  1980 (as amended) (the &ldquo;Labour Law&rdquo;) together with regulations  promulgated under that law. The Labour Law applies to all employees  working in the UAE, with a small number of exceptions. One of those  exceptions relates to employees working in the Dubai International  Financial Centre (&ldquo;DIFC&rdquo;) who are subject to the DIFC Employment Law No.  4 of 2005 (the &ldquo;Employment Law&rdquo;).<br /><br />Neither the Labour Law nor the  Employment Law contain provisions in respect of bonuses and it is  therefore a discretionary matter for employers in the UAE and the DIFC  as to whether employees receive bonus payments and, if so, how the  underlying schemes are operated.<br /><br />In some sectors or industries,  it is commonplace for employees to receive bonuses as a result of custom  or practice. Where this is the case, it is likely that the contract of  employment will make some reference to the payment of a bonus.  Contractual reference does not, contrary to popular belief, mean that a  bonus is automatically guaranteed. Ultimately, entitlement to a bonus is  a matter for whether the bonus is deemed to be discretionary or  non-discretionary and this, in itself, can be a tricky matter.<br /><br /><strong>Discretionary vs. non-discretionary<br /><br /></strong>Discretionary  bonuses (whether contractual or not) are those which give the employer  the ability to determine whether a bonus should be paid and, if so, in  what amount. Frequently, where a discretionary bonus is operated,  mention of such bonus will be omitted entirely from the contract of  employment. Alternatively, the contract of employment may mention that a  bonus scheme is from time to time operated but that payment of any  bonus is entirely at the discretion of the employer&rsquo;s management team  and usually subject to certain performance criteria of the individual  and the employer as well.&nbsp;<br /><br />Non-discretionary bonuses are those  which essentially guarantee payment of a bonus to the employee. Whilst  such schemes may utilise eligibility criteria, for example, requisite  length of service or performance targets, they nonetheless guarantee  payment to the employee (subject to meeting the prescribed criteria) and  remove discretion from the employer.<br /><br />It is not unusual for  employers to seek to retain an element of discretion whilst in reality  implementing non-discretionary bonus schemes. This might arise where the  employer implements a bonus scheme which refers to the company meeting  certain levels of turnover or profit and subsequently the employee  meeting targets but then goes on to state that the employer has overall  discretion as to payment of the bonus. In reality, such schemes are  non-discretionary and can create difficulties where the employer  believes that it has retained discretion when this is in actual fact not  the case.<br /><br />In order to avoid complaints, it is prudent for  employers to proceed with some caution when exercising their discretion  over the payment of bonuses. It is apparent that few employers consider  exactly what is meant by the term &ldquo;discretionary&rdquo;, and to what exactly  the discretion relates. A recent UK Employment Appeals Tribunal  decision, which may be persuasive in cases in the UAE and particularly  those before the DIFC Courts, indicated that &ldquo;discretionary&rdquo; in the  context or bonus schemes may mean:</p>
<ol>
<li>The provision of an overarching bonus scheme itself was discretionary;</li>
<li>A decision to operate the bonus scheme each year is discretionary;</li>
<li>The method of calculating the bonus is discretionary; or</li>
<li>&nbsp;The threshold or performance target which triggers a bonus payment is the subject of discretion.</li>
</ol>
<p>The distinctions could potentially have a significant impact on the  respective rights and entitlements of the employer and employee over the  bonus scheme and therefore it is imperative, where the contract of  employment or the bonus scheme documents refer to discretion, that there  is little doubt as to what this discretion refers to. This case  highlights the importance of setting out the terms of any bonus scheme  very carefully, and at the very least making it clear where the employer  can exercise its discretion - be that over the status of the scheme,  the calculation of any bonus payment, and/or the terms of entitlement to  any bonus payment. The fact that a bonus scheme has been referred to as  &ldquo;discretionary&rdquo; may not in fact give the employer the unfettered right  to withhold or refuse to make a bonus payment to employees.&nbsp;<br /><br /><strong>End of service gratuity (&ldquo;EoSG&rdquo;)<br /><br /></strong>An  employee is ordinarily entitled to an EoSG payment in the event of  termination of employment, so long as he has the qualifying length of  service (and is not being summarily dismissed). EoSG is calculated on  the basis of 21 calendar days' pay for each year of service for the  first five years, and 30 calendar days' pay for each year of service  thereafter. Pay for the purposes of EoSG is generally accepted as being  the employee&rsquo;s "basic pay", excluding allowances, provided that the  contract of employment properly distinguishes between the basic pay and  allowances.<br /><br />A recent Court of Cassation judgment has added some  confusion to this area.&nbsp; Essentially, the Court of Cassation has deemed  that EoSG calculations should be based upon basic salary and, in  addition, commissions or bonuses where such amounts are essentially  fixed or guaranteed. Accordingly, there is now a risk for employers  paying bonuses on a fixed or guaranteed basis that such bonuses may lead  to a much larger obligation on termination than originally intended.<br /><br />In  order to seek to limit the potential liability for EoSG for employees  who receive bonuses, it is advisable that performance indicators are  utilised which, if not met, mean that the bonuses are not payable.<br /><br /><strong>Managing expectations<br /><br /></strong>Despite  efforts to manage employees&rsquo; expectations, the award of (or failure to  award) bonuses can have both a detrimental effect on employee morale,  and may lead to allegations of breach of contract and/or discrimination.<br /><br />Where  an employer is intending to introduce a bonus scheme, caution should be  exercised to ensure that the rules of the scheme are sufficiently well  drafted to cover most eventualities.&nbsp; When drafting discretionary bonus  scheme rules, it is also important to consider in what circumstances  payments may not be made to the employee.&nbsp; For example, it is useful  practice to have a provision in the employee&rsquo;s contract saying that any  discretionary payment under the bonus scheme will only be made if the  employee is in employment on the bonus payment date, and is not under  notice (whether given or received).&nbsp; This is intended to enable an  employer to exercise its discretion not to award an employee a  discretionary bonus payment in circumstances where the employee has  resigned to go to a competitor, or has been dismissed part way through  the year.<br /><br />To avoid any dispute as to this matter upon termination  of employment, it is sensible to include wording in the contract of  employment (where the bonus is contractual) which states that any bonus  entitlement which has not been declared or paid out at the time of  notice being given or received is forfeited.<br /><br />It is also worth  considering what specific factors will be taken into account in  exercising discretion.&nbsp; Many employers prefer not to express this and to  leave their discretion as wide as possible.&nbsp; However, it may be helpful  sometimes to express that both employer and employee (and perhaps team)  performance can be taken into account in assessing the discretionary  payment which may be made to an employee. Moreover, mention of  discretion without clarity as to the scope thereof, may lead to  arguments as to what the discretion relates to (as discussed above).<br /><br /><strong>Potential disputes<br /><br /></strong>The  relevant case law also indicates that where an employer has an absolute  discretion, it must not exercise, or fail to exercise, that discretion  irrationally, and it must act in good faith particularly in the DIFC.  Cases in other jurisdictions have suggested that the test may be even  stricter than this, and that &ldquo;it is presumed to be the reasonable  expectation and therefore the common intention of the parties that there  should be genuine and rational, as opposed to an empty or irrational,  exercise of discretion&rdquo;.<br /><br />If discretion is exercised perversely or  irrationally, or in breach of any express conditions detailed in the  employee&rsquo;s contract or bonus scheme rules, the employee could bring a  claim for breach of contract. The damages sought would be the bonus  monies the employee believes he should have been paid. In addition, as  any breach would relate to the employee&rsquo;s remuneration (which is  considered a fundamental term of a contract of employment), it would be  open for the employee to resign and claim constructive arbitrary (or  unfair) dismissal. The employee would seek his notice monies, and  arbitrary dismissal compensation constituting a basic award of up to 3  months&rsquo; remuneration (outside of the DIFC) and potentially damages (in  the DIFC). Alternatively, the employee could remain in employment but  protest at the level/lack of bonus and commence proceedings for an  unlawful deduction from wages.<br /><br />When paying out a contractual  bonus, employers should be careful to ensure that they are making the  award in accordance with the rules of the scheme, otherwise a claim for  breach of contract is likely to ensue. Where this type of claim has come  before the UAE Courts previously, a pro-rated payment of the potential  bonus entitlement has been favoured.<br /><br />Finally, the employee could  claim that the discretion has been exercised in a discriminatory way.  This is more likely to be a serious consideration for employers in the  DIFC.<br /><br />When determining bonuses, employers should therefore be  cautious not to forget about those who remain employees but are not  currently working in the office, such as those who are on long term  sickness absence or maternity leave.&nbsp; Care should be taken to ensure  that those employees are treated fairly and in accordance with the rules  of the bonus scheme (which must not be discriminatory).<br /><br />Given  the complexities involved in drafting bonus schemes, it is often a good  idea to seek advice at an early stage, before claims are brought as a  result of employees not receiving what they had expected under the rules  of the scheme.</p>