Bonus disputes starting to gather pace

Luis-Marti Sanchez, a trader at Nomura, has recently claimed the bank breached his contract by paying him a bonus of £1.3m – only 4.3% of the profit he generated.

Sanchez claims he is owed at least 20% based on verbal promises. He is also disputing that his bonus was paid entirely in options, which may fluctuate in value. His total claim exceeds £7.5m.

Money matters

The case is part of an ongoing trend for senior employees to make bonus-related claims. This autumn, those considering such claims will gain encouragement on two counts. There are some High Court cases pending that are expected to address some legal issues that go to the heart of bonus entitlement. Also, 2006 is likely to be a bumper year for bonuses and, when there is that much at stake, there are bound to be disgruntled staff who feel they have been treated unfairly.

There has not been much case law in this area recently, but the case of Takacs v Barclays Services Jersey has given hope to those with potential claims. Although the case is at an early stage, the High Court has made it clear there is merit in the argument that contracts of employment contain an implied term preventing employers from avoiding express contractual obligations (including bonuses) by terminating employment early.

While they often stand alone, bonus claims are frequently combined with other employment claims and arise in different ways.

The first is where the employee claims the bonus was inadequate or where no bonus was awarded. Most bonus schemes in the financial services sector specify some performance criteria to be taken into account in exercising discretion on bonuses. Case law has made it clear that employers must exercise their discretion in a manner that is not irrational or perverse (Clark v Nomura International Plc [2000]).

Second, staff can claim they were dismissed to avoid a bonus being paid. Most schemes in the financial sector provide that a bonus will not be paid if the employee is not employed or is under notice at the payment date.

Bonuses also commonly feature in claims where staff have been dismissed without notice. They may have a claim for a pro-rata bonus for the proportion of the bonus year during which they worked and/or a claim for the bonus to which they would have been entitled had they been employed during their notice period.

In addition, where staff claim they have been dismissed by reason of discrimination or whistleblowing, they are very likely to claim loss of future bonuses, particularly if they will not get another job that offers equivalent earning opportunities.

But even if not dismissed, sizeable claims can arise on the basis that bonus awards were inadequate due to discrimination or whistleblowing. Also, missing out on promotions and/or pay rises can be a basis for claiming consequent loss of bonus.

Finally, some sophisticated schemes provide for payment of bonus after employment has terminated, conditional on compliance with restrictive covenants. Inevitably, these lead to disputes as to the enforceability of the covenants.

Common pitfalls

Schemes often specify not only the criteria for the level of bonus awards but who decides whether these criteria have been met. Decisions are often not made by those specified in the scheme.

Inconsistent treatment of staff. Employers need to ensure the decisions they make are transparent and objectively justifiable.

Failure to eliminate conflicts of interests. When a bonus is awarded, the decision-makers sometimes receive a bonus from the same pool. The risk of apparent corruption is obvious.

Key points

  • Claims against Barclays Services Jersey, Nomura and others are likely to clarify when bonus claims will succeed.
  • Bonus claims are often combined with other employment claims.
  • Unless bonus decisions are made with transparency, applying objective criteria, employers will be vulnerableto claims.
  • Training of line managers is key to ensuring improved practices in making bonus awards.

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