With employers needing to incentivise staff by offering performance related bonus payments (whilst still trying to maintain total flexibility over pay-outs) it is not surprising bonus disputes are a fruitful area for litigation.
Most problems arise out of employers wanting maximum “wriggle room” with the result that bonus agreements tend to be drafted in deliberately opaque language. The only exception, perhaps, are “signing-on” bonus payments which are usually guaranteed. In most cases employers’ aims are to secure an absolute discretion about both whether to award a bonus payment and, if so, when it will be paid.
The last thing a 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 have receipt of a formal offer, or after commencing employment.
By doing nothing, however, often leaves an individual no 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 especially where a potential bonus payment will make a material difference to the overall remuneration package being offered.
The starting point is to try and negotiate a bonus which is contractual (rather than discretionary) as this helps prevent subsequent arguments about whether a liability to pay has arisen at all. Even if the bonus is contractual, it is still likely to be subject to some form of individual or group (or both) performance criteria, meaning that any ambiguities in how it will 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 is 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 if the employer exercises its right to make a PILON.
A common feature in the financial services sector will be bonus claw-back provisions should an individual decides to leave within a defined period.
Bonuses and the Financial Services industry
Employees’ bonuses within the Financial Services industry are subject to regulation through various statutory provisions all of which have been crystallised into the Prudential Regulation Authority (“PRA”) Rulebook and the Systems and Controls sourcebook which are part of the FCA handbook.
The regulations catch a wide range of sectors including banks, investment firms, venture capital and stockbrokers and are complicated. For example, there are different levels of compliance depending on the size and nature of the organisation and there are de-minimis provisions for low earners.
The regulations provide for mandatory bonus clawback provisions for any organisation which is PRA and FCA authorised. In short arrangements must be made to be able to recover paid variable remuneration during a defined clawback period where there is evidence of employee misbehaviour or material error.
Most litigated bonus disputes stem from 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 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 has been no bonus award (or an 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 is no costs regime in Employment Tribunals, and it represents a sensible way for individuals to pursue claims without being at risk of an adverse costs order in the event any claim is unsuccessful. Note that bonus claims can only be brought within 3 months of termination of employment.
Bonus claims can also be brought be way of an unlawful deduction of wages claim under s13 Employment Rights Act 1996. Unlike contract claims in the Employment Tribunals there is no financial cap and claims can be brought during employment or within 3 months following termination.
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.