Discretionary bonus scheme: Not discretionary

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Discretionary bonus scheme: Not discretionary

Our client was an investment manager at an international bank. He was denied his bonus. The employer claimed that the scheme was “a discretionary bonus scheme”. We challenged the bank’s use of its alleged discretion and bonus calculation method. In the High Court, we proved that contrary to what the bank claimed, the bonus was not  a discretionary bonus scheme. 

Result

Our client received his full bonus entitlement, notice pay, a good reference and his legal costs paid in full.

How we got there

We met our client and discussed the situation. Our recommendations were:

  • To resign and claim constructive dismissal;
  • Make a case out to the bank showing why the discretionary bonus scheme was not discretionary;
  • Be prepared to litigate in the High Court if the bank did not back down. We knew there was a strong case.

Employment contract: guaranteed bonus

The employment contract included a guaranteed bonus payment. The bank calculated the bonus as a percentage of the “Economic Value Added”, generated by the director’s division. The bank calculated the available bonus pool as nil. However, the employment contract stated that the bonus payment was “guaranteed”.

Current trends in bonus schemes

Bonus disputes are increasingly common. Employers have shifted away from basic, fixed rate pay. It’s the discretion element that causes the disputes.

Constructive dismissal

We advised our client to resign on the grounds of constructive dismissal. By refusing to pay the bonus we claimed that the bank had breached its own employment contract.

Construction of the bonus

We argued the employment contract was clear on bonus entitlements. The contract said a bonus would be paid for every financial year. If sufficient Economic Value Added was about a prescribed floor (i.e. profits were good) then the bonus would be larger.  But the guaranteed element was guaranteed.

On a proper construction of the contracts:

  • The matter was not open to different interpretations.
  • The contract was final and binding.
  • The bank’s lawyers drafted the bonus plan. Any ambiguity should be construed against the bank.
  • The High Court should not interfere with the contract.

The bank’s defence

The bank argued the use of the Economic Value Added percentage:

  • Afforded the bank a degree of discretion as to whether or not to pay a bonus.
  • Was an industry practice. The bank claimed the investment team were aware of the practice and knew that Economic Value Added was zero.

Since the bonus entitlement stemmed from the contract, we claimed for:

  • Its full payment, rounded to the previous year’s payment, this being the foreseeable loss,
  • Our client’s notice pay under their contracts of employment for the constructive dismissal.

High Court’s decision

The High Court rejected the bank’s argument that the bonus payment, calculated on the basis of Economic Value Added, was discretionary. The High Court held that on a true construction of the contract:

The preparation of the accounts was for the bank’s own financial purposes, and although it gave an indication of the bonus to be paid, it gave no discretionary element. The use of guaranteed was clear, the bonus was fixed, only its amount variable, and where not clear, calculated using the parties’ course of dealing”.

The High Court held that the bank had abused the court process by attempting to defend its position. The contracts were clear enough. The High Court ordered the bank to:

  • Pay our client’s full bonus, to which he was entitled to when his employment ceased.
  • Pay for his notice periods, following the forced resignations.
  • Provide a favourable reference for use in future roles.
  • Pay our client’s costs in taking High Court action, payable on the indemnity basis.

 Alex Kleanthous is a partner in our employment law team with plenty of experience in resolving bonus disputes for personnel in the financial services sector.  In many cases his matters settle outside of court, usually under a settlement agreement, which is a cost effective means of disposing of disputes.