The employer's freedom of action in bonus schemes

The Supreme Court has ruled that a company was entitled to accrue and deduct a number of extraordinary costs in the basis of calculation of bonus to a dismissed employee.

The dismissed employee did not receive any bonus, as the company's pre-tax profit in the year prior to the dismissal did not reach the fixed minimum. This was because a number of extraordinary costs in connection with the closing down of one of the company's departments were included in the accounts.

The case concerned the basis of calculation of bonus and in particular how to construe the concept "pre-tax profit for the year".

Accounts were in accordance with international standards

Both the Maritime and Commercial High Court and the Supreme Court found that the method used to define "pre-tax profit" when calculating the bonus was in accordance with the bonus agreement's definition of the concept. It was also in accordance with the rules applicable to the presentation of the financial statements that extraordinary costs, including write-down relating to goodwill, costs in connection with the closing down of a department and costs in connection with the dismissal of employees, were deducted in the income statement.

Consequently, the company was entitled to deduct and accrue the extraordinary costs in connection with the closing down of a department.

Section 17a of the Salaried Employees Act

The employee also claimed that it was contrary to section 17a of the Salaried Employees Act when the salary expenses for a number of dismissed employees burdened the financial statements with one large lump sum, as these expenses would have been spread over a long accounting period if the employees had still been employed. The fact that other employees were dismissed will thereby impair the employee's possibility of obtaining a bonus in the notice period.

The Supreme Court dismissed this point of view and ruled that it was not contrary to section 17a of the Salaried Employees Act to calculate bonus based on the net profit for the year, including accruing obligations in connection with dismissals.

Comments

The ruling seems to be clear as it illustrates that employers enjoy great freedom when it comes to bonus programmes, and that extraordinary costs may be included in the "pre-tax profit for the year" as long as this is in accordance with the company's accounting policies.
In general, section 17a of the Salaried Employees Act does not limit the freedom of action, and the rule can therefore not be extended to automatically regulate how the employer must accrue costs in case of dismissals.

contacts

Marianne Lage

Partner

Christian Traberg Bennetzen

Attorney