It is hard to turn on the news without seeing headlines about the banking crisis and the outcry at big bonuses being paid to the top bankers. The Prime Minister has stated that there should be 'no rewards for failure and rewards only for long term success'.

With the recent assistance that Lloyds Banking Group has received from the Government there has been a clear statement that only the most junior staff will receive bonuses this year. These statements all seem very sensible in the current climate but how easily do they fit in with employee's contracts and entitlements?

Approximately 250 bankers at London's Dresdner Kleinwort are currently suing the bank for millions of pounds in unpaid bonuses following a takeover by Commerzbank. The bankers had received written notification of their bonuses late last year and the bank is now trying to vary these bonuses due to economic circumstances and massive losses.

The Legals

Contractual bonus schemes

Contractual bonus schemes are generally speaking more straightforward, however the risk to companies is much higher if it denies the employee their contractual entitlement. Potential claims for failure to pay a contractual bonus include:

  • Breach of contract
  • Constructive unfair dismissal
  • Wrongful dismissal
  • Discrimination (depending on the circumstances).

Discretionary bonus schemes

Bonus clauses are often drafted on a discretionary basis with the key goal being to put the employer under no obligation to implement a scheme or to award bonuses. The schemes often stipulate certain requirements from the individual or the company as a whole which must be met before the employer will exercise its discretion. Very careful drafting is required to try and ensure the scheme remains discretionary, however, in reality these schemes often through custom and practice take on some contractual elements. Employers are still at risk from claims if they fail to follow the rules of the scheme or if they act in a discriminatory manner with regard to the scheme. In addition, where the scheme has taken on a contractual nature, the employer is open to the claims listed above.

Case law has found that there is an implied term in employee's contracts which states that discretion should not be exercised irrationally or perversely and should be exercised objectively, rationally and in good faith.

Case Round Up

Bonus claims can be brought as an unlawful deduction from wages claim

  • Previously the Court of Appeal in Coors Brewers Limited v Adcock [2007] have held that unlawful deduction from wages claims under the Employment Rights Act are only designed for 'straightforward claims where the employee can point to a quantified loss'. 
  • Bonuses do not always fit into this definition and so invariably have to be brought as a breach of contract claim. However, in a recent case the Court of Appeal found that the bonus claim was quantifiable and straightforward and so the correct jurisdiction was the Employment Tribunal. The claimant in this case was able to quantify his exact loss by reference to a contractual formula.

This will make it much easier for claimants with a contractual formula to bring bonus claims in tribunals where it is less costly and generally quicker than the civil courts.

Tradition Securities & Futures SA v Alexandre Mouradian [2009]

Payment of night time bonus not sex discrimination

A claim was brought by two female employees claiming a night time bonus scheme was discriminatory on the basis of sex.

  • The Court of Appeal found that indirect sex discrimination had taken place as women with childcare responsibilities were less likely to be able to work nights.
  • However, the discrimination could be objectively justified in order to reward those who worked unsociable hours.

A common sense approach has been taken providing a welcome relief to employers.

Blackburn and anor v Chief Constable of West Midlands Police

Action plan 

  • Ensure bonus schemes are clearly drafted and operated consistently in accordance with the scheme rules.
  • In the current economic climate employers should consider reviewing their bonus schemes carefully.
  • To avoid employment claims it is important to honour current obligations and not unlawfully to change the rules of the scheme.
  • If bonus schemes are contractual, consider trying to agree a change with the employees involved. Alternatively, changes to the scheme can be made without agreement but this can involve a high level of risk and legal advice should be sought.
  • For future bonus schemes employers should give consideration to the following limitations:
    • Is the bonus scheme conditional on overall company performance?
    • Does the employee have to be employed as at the date the bonus is paid?
    • Is the bonus scheme limited to one year only?
    • Can the rules of the scheme be changed for future years?
    • Can the scheme be withdrawn for future years?

In summary

Although bonuses can be costly they are a useful tool to reward and incentivise employees. In the current economic environment it is important for companies to attract and retain the best possible staff in order to give them the edge over competitors. Consideration should be given to rewarding long-term success and careful drafting should be used to ensure failure is not rewarded. The drafting of bonus schemes is now more important than ever.