The cap

On 5 March 2013 the Council of the European Union published a document stating that EU finance ministers agreed caps on the bonuses that can be paid to bankers. George Osborne was the only dissenting minister who found himself outvoted 26 to 1.

From January 2014 bonuses will be restricted to 100% of bankers’ salaries. However, if shareholders consent bonuses can reach a maximum of 200% of salary. Such bonuses must be backed by either a 66% majority of a quorum of shareholders representing 50% of shares. Alternatively if the quorum cannot be reached, such bonuses can also be approved if they are supported by 75% of the shareholders present. The caps will apply to employees of subsidiaries of European banks who work outside the EU too.

They will also have to be capable of being clawed back and bail-in-able. Bail-in-able means that the bonus can be converted to debt or wiped out in the case of doubt as in the case of the bonus scheme announced by UBS in February 2013.

Although there is no draft legislation as of yet, this statement by the Council is binding and will clearly have an impact on the much reported “bonus culture” within certain financial institutions.

The current law

In light of this impending change, it is useful to examine the current state of the law as regards bonuses. The main point is that the law distinguishes between two types of bonuses: contractual and non-contractual. However, in reality the distinction is blurred.

If the employer reserves an absolute discretion whether to award a bonus or not, an employee cannot easily claim a right to any bonus. However, if this discretion is exercised irrationally, capriciously or arbitrarily the employee may be able to make a claim.

Employers may have a partial discretion to pay a bonus. Usually employers lay down conditions to be followed before discretion is exercised, typically involving the merits and performance of the employee.

Midland Bank plc v McCann UKEAT/1041/97 stated that a contractual bonus arises where there is a binding promise for an employee to receive a bonus, breach of which enables the employee to pursue an action and quantify their claim. That case suggested that bonuses are not necessarily contractual if they are provided for in policy documents.

In Small and others v Boots Company plc and another UKEAT/0248/08 it was held that employment tribunals will look at all aspects of a bonus scheme to determine whether it is contractual or discretionary. The law states that employers are not obliged to exercise their discretion reasonably, though they should do so in a manner that does not destroy the employer-employee relationship of trust and confidence.

Even if a scheme is discretionary an employee may try to lay claim to their bonus by arguing that they have an implied contractual right to it because of custom and practice. For example Noble Enterprises v Lieberum UKEAT 67/98 concerned a bonus scheme that was in operation for five years. The employer had discontinued the bonus scheme but it was held that the employee had a reasonable expectation that he would be entitled to receive a bonus. Employees may also seek a bonus if one is promised to them orally. Proving this will be a matter of fact dependent on the individual circumstances of the case.

There has been another case where employees were able to enforce the bonuses following the announcement of the bonuses in a general meeting so formality both in the granting of the bonus and its announcement is important.

There has been some litigation as to whether employers can demand that bonuses be repaid. Employees have for example argued that repayment clauses are invalid because they are penalty clauses. The Corporate Governance Code provides guidance that performance conditions should be relevant in assessing bonuses and upper limits should be set and disclosed.

Directors and senior employees

Contracts should be scrutinised by senior employees for conditions in relation to payment of bonus. Often an employee can be employed for the whole of the bonus year and a bonus may have been announced for payment say in a month’s time. An employee may be deprived of the bonus if given notice where there is a term which says that no bonus is payable if either party has given notice or the employment has ended before the payment is due.

Sometimes it may be evident that an employer has deliberately served notice to avoid paying the bonus. It may be arguable that an employee can recover the bonus on those facts but that is a difficult argument for an employee.

Comment

The issue of whether a bonus is payable and if so how much has up until now largely been a matter of contractual interpretation. Now statute is intervening. With the proposed legislation, contractual provisions will be invalid if bankers’ bonuses are awarded that exceed the new thresholds. It should however, be noted that there is nothing to stop banks reducing bonuses but increasing salaries.

It may be wise for banks to take the initiative to impose their own caps on bonuses and introduce shareholder approval requirements. This way the changes in January 2014 will not come as too much of a shock to the banking industry and its employees.

Public and political pressure has meant that bonuses within the banking industry will be looked at with increased scrutiny. In the wake of this, good drafting is of paramount importance and employment contracts should be reviewed accordingly. They should clearly state amongst other things whether a bonus scheme is contractual or non-contractual and what triggers entitlement.