Be wary of staff entitlement to ‘discretionary’ bonus pay

In the well-publicised decision in July 2003 of Horkulak v Cantor Fitzgerald International, an employee successfully claimed that the man-
aging director’s use of foul and abusive language amounted to a breach of the implied contractual term of trust and confidence. He was awarded 892,000 for wrongful dismissal, largely made up of an award for lost bonus payments.

One of the clauses in his contract provided that: “The company may in its discretion, pay to you an annual discretionary bonus the amount of which shall be mutually agreed however the final decision shall be in the sole discretion of Cantor Fitzgerald Limited Partnership”.

The High Court awarded damages of 630,000 for the discretionary bonus in July 2003. On 14 October 2004, the Court of Appeal reduced the damages awarded, but upheld the High Court’s finding that the discretionary bonus was a contractual benefit to which the employee was entitled. This was partly because the contract was for a high earning and competitive activity in which the payment of bonuses was part of the remuneration structure.

The most significant aspect of this decision is the finding that the payment of a discretionary bonus was not, in fact, discretionary, but a contractual entitlement. This is not the first time that an apparently discretionary payment has been found to provide a contractual entitlement. In Clark v BET, a clause providing for an annual salary review and an increase ‘if any as the Board shall in its absolute discretion decide’, was found to impose a contractual obligation on the employer to increase the employee’s salary.

The Horkulak case involved a culture where bonuses play an intricate part in the terms of remuneration. Whether a tribunal will order that a discretionary bonus was a contractual entitlement in other situations remains to be seen. It may, however, be prudent for employers to give some thought to making no reference to bonus arrangements in any of their employment contracts – particularly where the bonus could form a large part of the remuneration.

Bonuses and maternity leave

In October 2003, the Stratford Employment Tribunal held in Connolly v HSBC that an employee was only entitled to pro-rata payment of a performance-related bonus due to maternity leave. As money paid under the scheme was ‘remuneration’, the scheme was not a contractual right that continued during maternity leave, subject to the caveat that the employer could not make any reduction for the two-week period of compulsory maternity leave.

The same issue has recently been put before the Glasgow Employment Tribunal, in Hoyland v Asda Stores Ltd. The tribunal also concluded that the bonus must be paid in respect of compulsory maternity leave, but not in respect of ordinary maternity leave.

Asda operated a bonus scheme where payments were pro-rated to reflect part-time employment and absences of eight consecutive weeks or more during the bonus year. Maternity leave was treated as absence for the purpose of calculating bonuses. Mrs Hoyland claimed that Asda had unlawfully cut her bonus on account of her being on maternity leave.

The tribunal found that in this case, the bonus was ‘pay’ within the meaning of Article 141 of the European Community Treaty. It further found that when calculating a bonus, it was contrary to Article 141 to exclude the two-week maternity period during which an employee is not permitted to work under domestic law (‘compulsory maternity leave’). The tribunal rejected an argument by Mrs Hoyland that it was possible to expand this to cover ‘ordinary maternity leave’.

Accordingly, while Hoyland succeeded in her claim under the Equal Pay Act, she was only awarded compensation for the two-week compulsory maternity leave period, rather than for any ordinary maternity leave.

However, this was not the end of the story. Given the limited grounds on which the tribunal upheld her claim, Hoyland lodged an appeal. It is due to be heard during the week of 21 February 2005, but may be heard sooner. It is being viewed as a test case, with a number of similar cases likely to be brought if Hoyland succeeds in her claim.

The implication for employers as matters currently stand is that for the purposes of some bonus schemes, periods of compulsory maternity leave should be counted towards a period of work. If Hoyland’s appeal succeeds, periods of ordinary maternity leave may also need to be counted.

By Shirley McAloney, associate, Wragge & Co LLP

Comments are closed.