Awarding bonuses is notoriously controversial, as an employee’s own view of their ‘worth’ may not be reflected in their bonus award.
The courts have heard cases concerning the exercise of discretion, and a body of case law has developed around the way discretion can be exercised. As a result, the number of claims has undoubtedly increased (although the tribunals do not keep specific figures). And bonus payments have become a point of contention when agreeing exit packages – often resulting in the disgruntled employee filing a court claim.
But the tide may have finally turned in favour of the employer.
In Keen v Commerzbank, a highly paid employee sought to argue that his bonus payment just was not enough, but the court would not interfere with the exercise of the employer’s discretion nor with the express terms of the bonus scheme.
Sigh of relief
Indeed, it was a great relief to hear that “a court is not a bank” and “it is not the function of the court to usurp the bank’s exercise of its discretion”.
The Keen case consisted of two key elements:
n Had the bank exercised its discretion irrationally, perversely or capriciously in awarding discretionary bonus amounts of only £3m in 2003 and £2.8m in 2004, contrary to the line manager’s recommendation?
n Does the Unfair Contract Terms Act 1977 (UCTA) apply to employment contracts?
The Court of Appeal decided that:
n Keen had no reasonable prospect of arguing that the bank had exercised its discretion in an irrational, perverse or capricious manner in determining the 2003 and 2004 bonus awards.
n UCTA does not apply to employment contracts. A clause that stated employees must be employed by the bank on the bonus payment date was, therefore, enforceable and Keen had no prospect of winning this case.
This decision should give employers some breathing space and should also discourage claims.
Even if claims are brought, employers should seriously consider applying for summary judgment, where the employer has properly used its discretion to award a bonus and has acted in accordance with the express contractual terms. The employee would need to show that the employer’s decision to award the bonus amount is irrational.
Upcoming bonus cases
Overall, the new position on bonuses is comforting for employers, but it will be interesting to see what effect the next decision in the case of Takacs v Barclays Services Jersey Ltd will have.
This case concerns an additional conditional minimum bonus. It will also assess whether a contractual clause – stating that the claimant would receive awards for two particular years on the due dates if his employment had previously been terminated by the company other than for gross misconduct – would also apply to that conditional bonus.
Also of relevance is the decision in McCarthy v McCarthy & Stone plc, concerning the exercise of discretion in relation to share options.
Pointing to one recommendation for a higher bonus payment does not show that the contested bonus amount is irrational.
Employees may need an expert witness to show the bonus award is irrational, and demonstrate they have a case that does have a reasonable prospect of success.
Revisit bonus wording to ensure it is sufficiently wide in scope, so an employee cannot argue that any contractual term has been breached.
Provide employees with an explanation of the reasons for the exercise of the discretion. Decision-makers should provide this reason unless there is a good reason not to do so. Consider inviting employees to request reasons at the end of any award letter.
See December’s Employers’ Law magazine for advice on how to reduce the risk of bonus disputes.By Nicola Rabson and Paul Quain, Managing Associates, Linklaters