Gannons Solicitors 020 7438 1060
London solicitors specialising in the law relating to employment, partnerships/LLPs and company commercial
Employers go to great lengths to emphasise the discretionary nature of the bonus incentive pay and shroud the basis of calculation of the bonus incentive in great secrecy. However, employees can challenge the exercise of discretion under employee laws and have a right to be treated fairly.
Bonus incentive pay arrangements do come under scrutiny with the market demanding longer term payment provisions, risk based performance measures and claw back or retention provisions if performance later proves to be over stated. This is very acute in the financial services sector affecting bankers, dealers, brokers and hedge fund managers. However, implementation of claw back or retention provisions is not always legally possible.
We have summarised below why employers are not free to abuse bonus incentive pay and avoid making payment especially following a redundancy notice or redundancy consultation. We also summarise an employee's position under a claw back or retention arrangement delaying or deferring bonus incentive pay.
The general principle is that any decision to award a bonus incentive pay must be rational and in good faith. The decision must not be arbitrary or irrational. In practice, this means that a court or Employment Tribunal will look at the employment contract in question, the bonus scheme and any other employment documentation such as the employment handbook and the employer's past records to establish how the bonus or incentive pay is operated. The court or Employment Tribunal will decide if an employer has acted rationally and in good faith. This can sometimes lead to surprising results for employees.
In Clark v Nomura, a bonus scheme was described as discretionary, not guaranteed, and dependant on individual performance. The Court, however, decided that it was too rigid for the employer to base its decision on individual performance, as this would prevent the employer from relying on other legitimate factors. This is an employee friendly decision where the court appears to have taken the view that as the employee deserved a payment it was not going to let the employer hide behind its discretion to avoid a payment where it was irrational in the circumstances to do so.
It is possible that that an employer cannot dismiss an employee if the reason for the dismissal is to avoid its obligations to pay a bonus or incentive pay. There is the suggestion that an employer may be under a duty to co-operate with an employee in achievement of performance targets.
Employers are generally reluctant to specify the formula used to arrive at the payout. The test to determine what you should have received is what similar employees received. Employees have various rights to find out what similar employees did receive and should start asking the right questions if they are uncertain. What is beyond doubt is that any delay on the part of the employee in raising queries can be levied against him at a later date, so prompt action is required.
Questions often arise about the level of disclosure and the release of confidential information but with perseverance and a planned approach the information will eventually be obtained. Sometimes is it necessary to issue proceedings in court or an Employment Tribunal and apply for disclosure. Disclosure is the process which forces the employer to reveal information about bonus payments.
Quiet apart from UK employment law outlawing sex, race, age, disability discrimination and other forms of discrimination based on matters such as political beliefs, and the requirement automatically incorporated into employment contracts requiring equal pay, the courts have decided that employees must be treated evenly in relation to bonuses. This does not necessarily mean that employees must be treated the same (although if they are not, there could be discrimination and equal pay issues), but any different treatment must not be capricious.
Claw back is the recovery, or non-payment of a deferred element, of a bonus or share award when it later appears that the award was based on performance that was overstated or overestimated. This could be because the original decision on performance was wrong, or because facts have come to light since which show the performance in a different light. For example, a dealer or broker is paid on bringing in a large contract, but it subsequently transpires that the contract was unprofitable and was secured through misrepresentations.
Unless the terms of a bonus incentive pay award clearly specifies that cash can be clawed back under certain circumstances, there will be almost no chance of enforcement against an employee by an employer. There might be exceptions where the award was granted on the basis of misrepresented performance (especially if the individual was himself responsible for the misrepresentation); where the employee is guilty of serious misconduct and can be sued for damages which could include the bonus award; where the employee voluntarily gives up the bonus (as a number of senior bankers have done); or where there is special legislation to that effect. Usually however the provisions regarding claw back would need to be in the incentive arrangement from the outset.
Even where the contractual arrangements provide for a clawback, there are still possible pitfalls. It has been suggested that any provision for a clawback if the employee breaches the employment contract could fall foul of the rule prohibiting penalty clauses or that, if the clawback is triggered by breach of a restrictive covenant, the employee might be able to argue that the clawback is unenforceable as a restraint of trade. However the likelihood of success is low (Tullett Prebon v BGC Brokers).
Claw backs are inefficient for tax purposes because the relevant income tax and national insurance contributions will be payable on the original award but can not be adjusted later if any shares or cash are clawed back. It might be possible in some circumstances to credit the claw back against later income, although the rules on this are from clear at present.
Because of the difficulties with claw backs, many employers are pressing for retention arrangements whereby the deferred element is subsequently adjusted on a bonus/malus system which allows notional deduction from the deferred portion before payment. Some employers top up incentive pay by the use of loans. This is common for bankers, brokers, dealers and hedge fund professionals.
No matter what circumstances trigger the claw back or retention an employer cannot unilaterally enforce new provisions without the employee's consent. To stand any chance of enforcement the bonus incentive pay provisions must be accurately drafted to achieve the desired effect.
Executives need to ensure they have the means of ensuring the claw back or retention is fair.
back to topIf an employee is being made redundant and receives notification of redundancy consultation or a redundancy notice shortly before the cut off point for being eligible for a bonus incentive pay this may be an unfair reason for dismissal giving rise to an unfair dismissal claim despite the fact the employer may present the dismissal as redundancy. Redundancy pay is calculated to include loss of earnings and bonus incentive pay does qualify as earnings even though discretionary. In practice the loss arising on a bonus incentive payment following redundancy would be calculated by looking at historic bonus incentive pay and current expectations if the employee had remained employed.
There are a number of ways of approaching employers which vary depending upon individual circumstances. Tactics and sensitivity play a large part but employees do have the rights to ask questions and timing is crucial.
Unfair treatment can lead to a unfair claims, claims for breach of contract, constructive dismissal and in many cases sex, race, disability and/or age discrimination. When entering into a compromise agreement attention should be paid to the amount of compensation due in respect of a bonus or commission plan and the employee should press for the due entitlement. Similar considerations apply if a redundancy notice has been issued following redundancy consultations.
Khan v Dunlop Haywards (DHL) Ltd is an object lesson in how a well prepared employee can succeed in his claim regarding a bonus entitlement.
K’s employer, in view of his importance to the business, negotiated a special bonus arrangement for him. The terms of the bonus were discussed at several meetings but nothing was written down. K wrote a contemporaneous e-mail to his employer summarising the meetings about the terms of the bonus – and this was not challenged at the time by K’s employer. Subsequently K claimed in the High Court that he had not been paid in accordance with what he considered had been agreed (about £500,000). The court upheld his claim as, in the absence of a written agreement, the best available evidence was the e-mail sent by K.
Comment – here the employer’s arguments about the economic consequences of the terms of the bonus made no impact on the court’s strict contractual interpretation. Employees must ensure that any arrangements about pay are recorded in writing. It is essential that any discussions or negotiations about the employee's bonus entitlement are carefully recorded in writing and stored somewhere outside of the office.
In summary, employees can demand that their receive a fair bonus. Employees should be aware that they may ask questions about their bonus incentive pay and that they should act quickly. Incentive pay should not be overlooked in a compromise agreement or if dimissed following a redundancy notice or redundancy consultation. In order to obtain a fair bonus incentive payment, unfortunately, employees do need to be prepared to push employers.
Based in Holborn we serve clients in the West End, City, Covent Garden as well as other areas of London, the UK and internationally. We work with many bankers, brokers, dealers and financial specialists based in the City of London.
This paper is designed to provide a summary of the issues addressed. Therefore, it is not intended as a detailed commentary on the relevant law and any comments made should not be acted upon without first taking specific legal advice.