With the Chartered Institute of Personnel and Development announcing that pay rises will be below official forecasts, we wonder whether bonus payments will also follow suit.
Despite salaries in 2016 being predicted to rise at a slower rate than originally forecast, the low rate of inflation will hopefully mean that the fact that pay rises might be smaller than anticipated will not necessarily cause us all to tighten our belts.
Should employers choose to make smaller bonus payments, in line with lower pay rises, they will need to be careful that they are not breaching any implied or express contractual provisions in doing so.
That said, the recent High Court case of Paturel v. DB Services (UK) Limited does offer hope for employers who may be concerned about how they are dividing up a bonus pot.
In this case, the High Court was asked to determine (amongst other things) whether a bank acted in breach of an express term (to treat the claimant consistently with his peers) and an implied term (to act in good faith and rationally) within a trader's contract of employment when it awarded him a smaller annual bonus than other traders.
Mr Paturel was employed on the money markets derivatives desk of DB Services (UK) Limited's global finance department. He was entitled to a discretionary bonus. The bonuses which he received in 2008 and 2009 were lower than he had anticipated and, when he discovered that two colleagues, who were entitled to receive guaranteed bonuses based on a formula, had received much higher bonuses, he brought a breach of contract claim.
The High Court held that the express clause within the trader's contract which stated that:
"The portion of your Incentive Award under DB compensation plans will be determined in a manner broadly consistent with that applied to your peers at similar levels of compensation" had not been breached, as the wording of the remainder of the clause itself recognised that there might be guaranteed bonuses in contrast with discretionary bonuses. In addition it did not simply reference "peers" but "peers at similar levels of compensation".
The implied term to act in good faith and rationally had not been breached, as the employer had sound reasons for awarding the trader's colleagues a guaranteed bonus on a formula basis as opposed to a discretionary bonus as awarded to the claimant, namely in order to retain their services and ensure they did not leave.
Whilst this case is quite fact-specific, it does provide welcome comfort that the courts will usually not interfere with an employer's exercise of contractual discretion in making bonus payments if the employer has exercised that discretion:
- honestly and in good faith; and
- in a way that is not arbitrary, capricious or irrational.