With employers needing to incentivise staff by offering performance related bonus payments (whilst still trying to maintain total flexibility over payouts) it’s not surprising that there’s so much litigation concerning their non-payment.
A lot of claims stem from the fact that in order to afford employers maximum “wriggle room” most bonus agreements tend to be drafted in deliberately opaque language. The only exception, perhaps, concern “signing-on” bonus payments which are usually guaranteed.
The last thing any prospective job applicant wants to do is antagonise their new employer by attempting to thrash out the fine detail of a performance related bonus, either before they have received a formal offer, or shortly after commencing employment.
By doing nothing however, it often leaves an individual with nothing more than an informal commitment about bonuses being paid in the future. Several months may elapse before the subject is raised again by which time of course, the individual’s bargaining position is much weaker.
Job applicants with formal offers should therefore have a keen eye on any contractual provisions which may impact on subsequent bonus entitlements.
The starting point is to try and negotiate a bonus which is contractual (rather than discretionary) as this should prevent subsequent arguments about whether a liability to pay has arisen at all. Even if the bonus is contractual, it’s still likely to be subject to some form of individual or group (or both) performance criteria, meaning that any ambiguities in how will it work in practice needs to be clarified.
Employment contract provisions affecting bonus payments
If the contract of employment refers to a bonus entitlement then it’s fairly common to also see references to the bonus being forfeited if the individual has either been given notice of termination or resigns. Likewise with contractual PILONs (a clause dealing with the employer’s right to pay salary in lieu of notice) any bonus entitlement will usually be excluded.
A common feature in the financial services sector will be bonus clawback provisions should an individual decide to leave within a defined period of time.
Most litigated bonus disputes usually stem from the non-payment of discretionary bonus schemes. There appears to be an established fine line adopted by the Courts in acknowledging that employers who reserve an absolute right whether or not to pay a bonus (and how much) are entitled to exercise that discretion as they see fit. In doing so, however, they are not allowed to behave irrationally or perversely. Therefore, in situations where there’s been no bonus award (or an extremely ungenerous one) a Court will assess whether the employer’s decision fell within a “band of reasonableness”.
The most recent Court decisions on bonus disputes focus on whether the employee has established a legitimate expectation to a bonus. If he has then the Court will then look to assess the reasonableness of the employer’s decision.
Bonus claims can also be brought in the Employment Tribunals but the amount of any claim is limited to £25,000. Save for limited exceptions there isn’t a costs regime in Employment Tribunals and it represents a relatively adverse costs risk free way of pursuing claims for individuals.
As an alternative, claims can be brought in the County Court (for claims up to £50,000) and the High Court for claims over this amount. There is a costs regime in the Civil Courts. Depending on the merits of any claim both Conditional Fee Funding and After the Event Insurance is an option in order to help mitigate the costs risks associated with civil litigation.