The High Court has held that employers cannot refuse to pay a discretionary bonus by relying on previous practice or alleged City or industry custom (Rutherford v Seymour Pierce Limited).
Often, discretionary bonuses are paid under the most general of contractual provisions, for example:
"You will be entitled to participate in the Company's discretionary bonus scheme. Any bonus payments or amendments made to the scheme are at the discretion of the Company."
Mr Rutherford's contract of employment with investment bank Seymour Pierce Limited (SP) contained exactly this wording.
SP dismissed him on 28 November 2007 and then refused to pay him a bonus for the final quarter of the financial year to 30 September 2007. It claimed that:
- it was accepted City practice that if an employee had left or had given or received notice, they were no longer eligible for a discretionary bonus; and
- it had been SP's custom not to pay bonuses to employees in such situations.
The High Court disagreed. It refused to accept that there was a "common City practice" of the kind asserted by SP. Even if SP had treated other employees in his position in a consistent manner, this did not mean that there was any basis for implying such a term into Mr Rutherford's contract.
SP should have considered him for a bonus and, in accordance with previously established law, should have made a fair and rational decision about the amount of his bonus, even though he had ceased to be employed. SP was ordered to pay Mr Rutherford a bonus of £70,000 for the last quarter of 2007. They were heavily criticised by the Court for the almost total absence of written records relating to the reasons for Mr Rutherford's dismissal, which was allegedly on performance grounds, and this led the Court to infer that it may in part have been due to a desire to avoid paying him a bonus.
Impact on employers
- This case is the first in recent times to test the commonly encountered, but now untenable, views that:
- an employer's past practice in dealing with employees creates an implied term in another employee's contract; and
- market or "City" practice can create implied limitations on contractual rights.
- Poor record keeping on performance issues and the decision to terminate undermined the employer's case on bonus and led to the inference that the dismissal was partly to avoid paying bonus.
- Contracts and/or bonus schemes should expressly set out what an employee's bonus entitlement is on termination of employment.
- The contract can state that the employee will lose all eligibility for bonus when notice is given or when their employment ends but, if it does not, the employee will continue to be eligible in relation to periods during which they have worked.
- The employer cannot necessarily award the employee a zero or much-reduced bonus just because they have left or are under notice.