Make bonus schemes transparent to avoid non-payment challenges

Bonus schemes must be transparent and well-understood by staff to prevent legal problems arising when workers resign, emp­loyment lawyers have warned.

Last month seven City brokers sued their former employer ABN Amro bank after it withheld parts of their bonuses when they resigned to work for a competitor.

Under a compensation system prevalent in the City of London, known as ‘good leaver, bad leaver’, employees who leave to work for a rival may be classified as ‘bad leavers’ and forfeit bonuses that have yet to be awarded – usually in stocks which can only be cashed in after two to three years with the company. ‘Good leavers’ would include those who retire after long service.

But the seven brokers, headhunted by dealer Tullet Prebon, said parts of their bonuses earned at ABN Amro between 2004 and 2006 that would have been paid as company shares should be awarded to them in cash.

They argued that forcing them to forfeit their deferred compensation rights was an unlawful restraint of trade, as it effectively penalised them for taking a new job.

Guy Guinan, an employment partner at Halliwells law firm, told Employers Law: “The operation of a bonus scheme does not prevent an employee from working anywhere else, it just means that the emp­loyer will not be rewarding the employee as much if they decide to do so.

“If there is a clearly transparent bonus scheme, the employer will be able to rely upon it, and the employee will be bound by its terms,” he added.

Mark Taylor, employment partner at law firm Jones Day, said the purpose of the bonus scheme must be determined from the outset to avoid disputes. “In this case, ABN Amro will argue that the cash part reflects the reward for recent performance while the stock portion is a legitimate means of rewarding those who stay the longest or leave and do not seek to compete.”

City workers were paid £12.6bn in bonuses in the first quarter of 2008, according to the Office for National Statistics.