Case Study: Settlement agreements for bonus disputes

Our client, a London based marketing agency (our “Client”), faced a dispute with a former director (“Director”), who was leaving the company. The Director claimed entitlement to a substantial performance-based bonus for the year, despite not having completed the full bonus period.

Background

Our Client had a performance-based bonus scheme in place, which required participants to remain actively employed for the full performance period, in order to qualify for the bonus. However, due to the Director’s early termination, our Client believed that no bonus payment was required. Our Client sought our advice, given the financial impact of paying the bonus was over six figures and in order to understand the company’s obligation to pay out bonuses for similar matters going forward.

Our approach

Working closely with our Client, we reviewed the terms of the Director’s Service Agreement (the “Contract”), as well as the company’s bonus scheme. We focused on the specific language regarding the Director’s eligibility for the bonus, especially in cases of early termination. We identified that the bonus was contingent upon the Director being employed throughout the entire financial year in order to qualify.

Settlement Agreement

We were instructed to correspond with the Director’s solicitors, in order to negotiate and achieve a favourable outcome for our Client. During the negotiations, we argued that the Director’s early departure invalidated his claim to receive the bonus, as he had not met the full-year performance requirements, as set out in his Contract and the bonus scheme.

Given our experience in commercial dispute resolution, we prepared a draft settlement agreement, which clearly outlined the Director’s forfeiture of the bonus, but also included the following key terms:

• waiver of claims: waiving the Director’s entitlement to bring any future claims against our Client in respect of the bonus or other entitlements.
• confidentiality provisions: protecting our Client’s reputation, as well as keeping secret (1) the events leading up to the Director’s departure and (2) the terms of the Settlement Agreement.
• ex-gratia payment: compensating the Director for his loss of office. The first £30,000 of this payment was made tax free.
• restrictive Covenants: preventing the Director from joining a direct competitor for 6 months following his termination, safeguarding our Client’s business interests.
• legal fee contribution: contributing towards the Director’s legal fees, in order to obtain independent legal advice on the terms of the Settlement Agreement.

Outcome

We were able to support our Client with navigating this complex dispute, by ensure our Client’s compliance with the contractual terms of the Contract and the bonus scheme. As such, our Client was able to successfully avoid paying the bonus, while entering into a mutual settlement with the departing Director. The settlement agreement was as a useful tool, which provided finality to the dispute and avoided costly litigation, whilst also protecting our Client’s reputation.