Legal opinion: Lessons from the Commerzbank case on employee bonuses

The High Court decision in Attrill and others v Dresdner Kleinwort Ltd and Commerzbank AG offers a stark warning to employers about the risks of making oral promises to employees on their entitlement to bonuses. Commerzbank, in this case, was left to pay more than €50 million in damages and an estimated €15 million in costs. Michael McCartney, partner at Fasken Martineau LLP, looks at the practical lessons employers can learn from this case.

Take care how you communicate information about the bonus pool to staff

Dresdner decided to announce to all staff that a minimum bonus pool of €400 million would be guaranteed and distributed to front and middle office staff according to performance “in the usual way”. Attendance at the meeting was either in person or via live video link and the commitment to the bonus pool was subsequently confirmed on a number of occasions. The decision to guarantee the bonus pool had been taken to stem a growing tide of defections which had threatened Dresdner’s stability on the market.

Bonus letters were sent out four months later in December 2008. These made reference to a material adverse effect clause upon which payment was conditional. However, employees had been reassured this clause was unlikely to be invoked. Notwithstanding this, on completion of the sale of Dresdner to Commerzbank on 12 January 2009 the clause was invoked and the employees were informed that their bonus entitlement had been reduced by 90%.

Avoid statements which have the potential to create a legal obligation

Usually the formation of a contract occurs when there has been an acceptance of an offer in circumstances where:

  • the offer was sufficiently certain to create a legally binding obligation;
  • the parties intended to create legally binding obligations;
  • the offer was capable of acceptance; and
  • consideration was given and/or received.

The announcement did not contain any details of the bonus (whether cash or cash equivalent), nor did it state where it would be paid and how much each individual recipient would receive, nevertheless the Court decided that the bonus pool was sufficiently clear to create a legal obligation on Dresdner to set aside this bonus for its employees.

Don’t rely on exclusions/powers contained in the staff handbook

Dresdner attempted unsuccessfully to rely on a provision in the staff handbook giving it the power unilaterally to vary the bonus terms. The Court construed the clause strictly and held that the correct procedure for any change had to be followed. Under the clause in the staff handbook, unilateral changes could only be made by a member of the human resources department.

Contractual promises should be clearly set out (preferably in writing)

There is a clear need to tread cautiously where verbal communications are made. Where the intention is to not create a legally binding obligation consider including disclaimers to that effect. Verbal communications should be followed up with written confirmation setting out the precise terms of any promise or announcement.

Only authorised individuals with the necessary authority should make staff announcements affecting pay or benefits. Internal policies contained in company handbooks should be complied with to avoid an action being deemed void as a result of a basic procedural inadequacy.

What actions should be taken to ensure risk compliant remuneration policies?

The FSA Remuneration Code, which came into force on 1 January 2011, together with proposals currently being discussed in Parliament, are aimed at ensuring remuneration is administered in line with risk profiles.

Under the FSA Remuneration Code a major part of bonuses have to be deferred for between three to five years depending on their size, with a minimum of 40% of any bonus being deferred over a period of at least three years for all regulated staff. For the most senior management, or where a bonus is estimated to be more than £500,000, the percentage to be deferred rises to 60. In addition, at least 50% of bonuses must now be paid in shares or an equivalent non-cash alternative.

What is the relevance to employers outside of the finance industry?

Regulation of remuneration aimed at reducing companies’ risk profiles has spread to the insurance industry and is due to affect hedge funds and a wider section of financial services companies by July 2013 (ie Tier 4 Companies, property funds and venture capital funds).

What other trends can be identified in the financial sector?

Guaranteed bonuses such as in Commerzbank are no longer permitted save in exceptional circumstances. Remuneration packages are increasingly characterised by higher bases, strictly controlled bonuses, and long deferred schedules which look at risk, performance and behaviour. Increasingly, firms are trying to take advantage of the deferred schedules by incorporating anti competition clauses preventing outgoing employees from obtaining those deferred benefits.

There are a number of proposals currently being discussed in Parliament including the Enterprise and Regulatory Reform Bill, which will have an impact on the administration of employment contracts. In so far as is possible employers are advised to keep up to date with the ever frequent amendments to employment regulation, case law, and industry specific regulation.

Michael McCartney, partner and head of the employment practice group at Fasken Martineau LLP

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