Bonus Payments
Bonus Payments - A Matter of Discretion
03/12/2007
With the bonus season upon us amid gloomy predictions of a lean year to come employers and staff may care to be reminded of two recently decided cases concerning the extent of an employer's discretion in awarding bonuses. This time both favoured the employer.
A widely used contract term allows an employee to participate in a staff bonus scheme with any award, its amount and timing being at the employer's discretion, and furthermore no bonus may be payable if on the date of payment the employee is no longer employed or is under notice to leave.
But the discretion is not totally unfettered. A breach of discrimination law would be an obvious example. Sometimes, however, a disgruntled employee may seek to claim that a decision was perverse or irrational and in breach of the implied term not to act so as to damage the mutual relationship of trust and confidence between employer and employee.
In Commerzbank v Keen (Court of Appeal) the claimant, whose contract contained terms identical to the above, was paid large bonuses for the years 2003 and 2004 awarded in March of each of the following years. He was made redundant in June 2005 after closure of his trading desk. He received no bonus for 2005 and sued the bank. He claimed that it had exercised its discretion perversely or irrationally in not awarding more substantial bonuses for 2003 and 2004 and in failing to award him a bonus for 2005. He failed in his claims. The Court of Appeal held that the burden of establishing that the level of a discretionary bonus payment by the employer was irrational or perverse was very high and, since the Bank had very wide contractual discretion and in view of the lack of evidence regarding the size of the bonus pools for 2003 and 2004, the awards for those years could not be said to be irrational.
As to the claim for a bonus for the year 2005 he did not qualify as a matter of construction of the contract as he was not employed at the relevant time and the concept of reasonableness of the term could not be imported under section 3 of the Unfair Contract Terms Act 1977 since the employee was not a consumer vis-a-vis the bank. Additionally the term relating to discretionary bonuses did not come within the employer’s standard terms of business.
This case was followed by the High Court in Ridgway v JP Morgan where the Court decided that the bank was entitled to award a nil bonus to a trader who had spent most of the bonus year on sabbatical albeit that the agreed terms of the sabbatical allowed him to be considered for a discretionary bonus for that year. The Bank was also entitled to take into account the fact that the trader had been making a loss before he went on sabbatical. The court said that the task of proving irrationality or perversity in the exercise of discretion was "a daunting one".
While human resources departments and others may welcome these decisions they must continue at all times to follow fair and open decision-making procedures in exercising their discretion. If they do, a dissatisfied employee will need clear evidence of failure on the employer’s part. Without that evidence the hurdle may be too difficult to attempt.
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