Discretionary Bonus: Are Discretionary Bonuses Enforceable?
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Discretionary Bonuses: Many people who work in the City of London or Canary Wharf in banks or other financial institutions will find that they are paid a basic salary, plus an annual bonus which may be 100% or even more of their basic pay. Sometimes such bonuses will be expressed to be ‘discretionary’, even though a minimum bonus is paid year in year out. Other times they will be expressed to be paid based on the performance of the employee and the overall performance of the business. Sometimes there will be more of a contractual commission structure in place, whereby the employee is paid a fixed percentage of income generated by that person.
Often problems with bonuses will arise when an expected bonus does not materialise, or when the employee is made redundant or otherwise resigns part way through the bonus year. In these circumstances the bank will often claim that there is no entitlement to the discretionary bonus, and any entitlement to the bonus is forfeit upon leaving. The problem is that the employee, who relies on the annual bonus as the main part of his or her annual income, is suddenly left with only the much lower basic salary.
Some cases reported in 2010 following the financial crisis in the City cast show conflicting approaches of the Courts when considering this difficult area:
In Small and others v Boots Co in 2009 in the Employment Appeal Tribunal (the EAT) a long-standing performance related bonus was removed, and the employer argued that it could remove the bonus because it was only ever ‘discretionary’. The EAT held that it was necessary to take into account the extent to which the employer can exercise discretion. The term ‘discretionary’ may apply to whether to pay a bonus at all, its calculation, when it should be paid, and other factors. Mere use of the term ‘discretionary’ does not mean that the scheme is non -contractual and the EAT held it was wrong to disregard the invariable practice of making payments over many years. In other words, if a bonus has been paid year in year out at a certain minimum level, the employee has a stronger basis on which to argue that the bonus ceases to be ‘discretionary’ and becomes a contractual right.
In Fish and another –v- Dresdner Kleinwort Ltd in 2009, Dresdner announced a Euro 400 million pool, and then sent Mr Fish a letter stating informing him of the specific bonus that he would receive. Following the banking crisis Mr Fish was made redundant, and signed a compromise agreement confirming that the bonus would be paid. Dresdner was then taken over by Commerzbank who refused to honour the payment, arguing that the extent of the financial crisis was not known at the date the compromise agreement was agreed. The Court found for Mr Fish. The compromise agreement was freely and properly entered into between Mr Fish and Dresdner.
In GX Networks Ltd v Greenland in 2010 Ms Greenland was entitled to basic pay, performance commission, plus ‘over-performance commission’ on new business exceeding her target, and which was three times the normal performance commission. The agreement however said that the sales director had the discretion to cap the quarter 4 bonus ‘by exception only’ and with HR and Finance agreement. Ms Greenland earned over-performance commission of some 4.5 times her basic pay. The company then decided that that was much more than they had envisioned paying her, and decided to cap commission at 130%. The Court of Appeal took the view that the ‘by exception’ clause was not an unfettered discretion, and meant in exceptional circumstances. Just because Ms Greenland was exceptionally successful at sales did not give the company an excuse to cap the commission. Exceptional circumstances that might have been grounds to cap the bonus could have been misconduct by her or dire financial straights for the company. Neither such circumstance applied in this case.
In Khatri v Cooperatieve Centrale Raiffesien-Boerenleenbank BA 2010 in the Court of Appeal Mr Khatri was offered a guaranteed bonus to stay in employment to a certain date plus a Performance Related Bonus, subject to a formula based on his individual revenue generation. However, it then stated ‘The bank maintains the right to review or remove this formula-linked bonus arrangement at any time.’ Subsequently, Mr Khatri was put at risk of redundancy, but then offered another contract under which the Performance Related Bonus, using the formula was to be converted into a discretionary bonus, and subject to post termination restrictions. He did not sign his agreement to this and was not chased for it. Mr Khatri continued to do the same job as before. Mr Khatri was subsequently made redundant and the bank refused to pay him his Performance Related bonus, arguing that it had referred the right to withdraw the bonus ‘at any time’. The Court found for Mr Khatri.
In context, the reference to changing the Performance Related Bonus really meant that the specific bonus applied for that particular year, but may be changed in the future. Furthermore Mr Khatri had not signed the new contract, and had not been chased to do so, and furthermore worked in the same capacity as before. Under the ‘Solectron Scotland v Roper’ test, Mr Khatri’s conduct, by continuing to work, was not only referable to his having accepted the new terms imposed by the employer. It would be quite wrong in these circumstances to infer that he had accepted the changes to his contract.
In Rutherford v Seymour Pierce Ltd in 2010 Mr Rutherford was entitled to a discretionary bonus. He left employment before the payment of the bonus was due having been summarily dismissed for poor performance. Was there an implied term that in order to be eligible for the award of the discretionary bonus, Mr Rutherford had to be employed and not under notice of termination as at the date of the payment? The court said no, there was no implied term that he should be in employment at the date of the award of the bonus. Of course in this case the employer might have expressly stated that he forfeit his bonus if he left part way through the bonus year for any reason, and there would still be the question about how much discretionary bonus he should get, given the problems with his performance.
However in Locke v Candy & Candy Ltd 2011, Mr Locke was entitled to a discretionary bonus and a guaranteed bonus, but expressly subject to him being employed at the time. Mr Locke was summarily dismissed, and Candy reserved the contractual right to make a payment in lieu of his basic salary for the notice period, but not paying him the bonus. Mr Locke not unnaturally claimed he should get a payment in lieu of the guaranteed and discretionary bonus as well. The Court of Appeal found for the employer. Because the bonus clause said he had to be employed at the time, and because the company reserved the contractual right to make a payment in lieu of notice, his pay in lieu of notice did not include the bonus. Some legal commentators think that this was wrongly decided though.
In Humphreys v Norilsk Nickel International in 2010 Mr Humphreys was entitled to a Performance Bonus to be assessed by the Board depending on his individual performance levels to be decided by them. There was a performance table for Mr Humphreys, but it was unclear how they were assessed. The company posted a heavy loss and informed him that his performance was unsatisfactory and that he was not entitled to a bonus. The Court found for the company. It was up to the management board to subjectively assess the bonus. Furthermore, it was up to Mr Humphrey’s to persuade the court that his performance grading was irrational, and he failed to do so. It appears that the Court was heavily influenced by the losses the company suffered. The company would have been wiser to say that bonuses were based both on the performance of the company and of the individual, and the case could easily have gone the other way.
Conclusion: These cases demonstrate that just because payment of a bonus is expressed to be ‘discretionary’, the employer does not have an unfettered discretion, and there are a number of factual matters which may be taken into account when reaching a decision. Employees should take careful legal advice if a bonus they thought was going to be awarded does not materialise.
Call today on 0207 118 0950 to speak to an employment solicitor about the enforceability of your discretionary bonus. (Last updated April 2011).
See also Hills v Niksun 2015