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When bonuses fail to match expectations
Financial Times (Fund Management)
18 December 2006
Christmas is bonus season and many of the City's top performers are receiving larger than ever payouts this year.
The Centre for Economics and Business Research has predicted that the City's movers and shakers will be awarded bonuses with a total value of Pounds 8.8bn (Dollars 17.3bn, Euros 13bn). But what about employees who are not happy about the size of their bonus? There are always going to be individuals who are disgruntled at their award, and increasingly those individuals are seeking redress through the courts.
There have been some high profile claims against the large investment banks, including one valued at Pounds 8m against Commerzbank and a host of multi-million pound claims against Nomura.
Traditionally the structure of most City bonus schemes has made challenging a payment in court difficult; the grounds upon which bonuses are paid are often less than transparent and the ultimate decision is at the "discretion" of the employer. This discretion was once seen as virtually absolute.
The landscape has changed, however, with a number of key cases being decided in recent years that have resulted in the concept of "discretion" becoming subject to various checks and balances.
Following the landmark case of Horkulak versus Cantor Fitzgerald in 2004, a term is now implied into every contract of employment requiring an employer to exercise its discretion in good faith and not in a perverse or irrational manner. This applies both to the question of whether to award a bonus at all, and what level of bonus to pay.
Since this decision, if an employee receives a bonus that is much lower than he or she reasonably anticipated, or is not paid a bonus at all, an employer must be able to show good reasons for the decision to avoid a successful claim.
In deciding whether a discretionary bonus has been properly assessed a court will usually consider the performance factors set out in the contract, the performance of the team in which the individual is a member, the individual's performance, how similarly performing employees are treated and industry custom and practice.
The important thing is that any decision to reduce bonus payments needs to be justified and consistent in its application. For example, a reduction might be justified by a team's poor financial performance but if certain team members still get better bonuses than some of their colleagues, this could give rise to valid claims.
James Keen, a top trader at Commerzbank, recently lost his high profile case over Pounds 8m in disputed bonuses at the Court of Appeal. However, the Court of Appeal's judgment strongly indicated that employers need to be able to justify their bonus decisions and that a failure to do so could support claims of irrationality. So, despite the decision in this instance going against Mr Keen, bonus litigants are likely to rely upon the judgment when pursuing claims against their employers.
A significant number of bonus claims arise out of employees being fired just before their bonuses are due to be paid, meaning they often lose their bonus for the whole year as a result.
A case on this issue against Barclays Services Jersey has been attracting a lot of attention recently. The case concerns an investment banker, Mr Takacs, who was dismissed by Barclays for failing to meet his targets, before the annual bonus awards were made. His claim is that this was a breach of the implied term of mutual trust and confidence in his contract, making it unlawful.
Mr Takacs claims that Barclays prevented him from achieving his targets by carrying out a restructure that involved the recruitment of a large team of specialists who took over the deal he was involved in. Mr Takacs is arguing that it should be unlawful for employers to obstruct employees from achieving their targets because the duty of trust and confidence imposes obligations of "co-operation" and "anti-avoidance" on them. Although these are novel concepts in contractual bonus claims, a High Court judge has ruled that the case has reasonable prospects of success.
The new age discrimination legislation provides another angle from which to challenge bonus awards. If individuals find that colleagues in younger or older age groups are being better rewarded, they may be able to bring age discrimination claims at the Employment Tribunal. If successful, such claims could result in high levels of compensation because claimants are likely to cite the colleague with the highest bonus as their comparator for these purposes. Employers will need persuasive justification, supported by evidence, to defend any discrepancies in payouts.
Given the high-profile legal developments in this area, it seems almost inevitable that more individuals will bring their employers to court over their bonuses this year, meaning many City institutions will find themselves faced with legal action by employees past and present worth millions of pounds.
Claire Dawson is a solicitor in the employment team at Russell Jones & Walker