Discretionary bonus scheme dispute

  • Posted

Gannons resolved a bonus dispute in favour of our client.

Our client was an investment manager at an international bank. His employer claimed that their bonus scheme was discretionary, and thus denied our client his bonus. 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.

Current trends in bonus schemes

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

Resolving the situation

We met with our client and discussed the situation. Following his briefing, we advised him firstly to resign and claim constructive dismissal. Then we would make a case out to the bank showing why their discretionary bonus scheme was not discretionary.

We also advised him to be prepared to litigate in the High Court if the bank did not back down. However, we knew we had 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” (EVA) by the director’s division. The bank had calculated the EVA as nil, leading to the dispute. However, the employment contract stated that the bonus payment was “guaranteed”.

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 fiscal year. If sufficient EVA was a prescribed floor (i.e. profits were good) then the bonus would be larger. However, it the contract clearly gave a guaranteed entitlement to a bonus.

On a proper construction of the contracts the matter was not open to different interpretations. Therefore the contract was final and binding. Given that the bank’s lawyers had drafted the bonus plan, any ambiguity should be construed against the bank.

The bank’s defence

The bank argued the use of the EVA percentage afforded the bank a degree of discretion as to whether or not to pay a bonus. Using it was an industry practice. The bank claimed the investment team were aware of the practice and knew that EVA was zero.

Our claim

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. We also claimed for our client’s notice pay under their contracts of employment for the constructive dismissal.

Result

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

High Court’s decision

The High Court rejected the bank’s argument that the bonus payment, calculated on the basis of EVA, 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.

High Court’s actions

The High Court ordered the bank to pay our client’s full bonus, to which he was entitled to when his employment ceased. It also ordered the bank to pay for his notice periods, following the forced resignations and provide a favourable reference for use in future roles. Additionally, the Court ordered the bank to 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 and many other types of business disputes. In many cases his matters settle outside of court, usually under a settlement agreement, which is a cost effective means of disposing of disputes.