01 January 2007

Employment news - winter: Banking on a bonus

Keen v Commerzbank and Takacs v Barclays Services Jersey Limited are the latest cases in a long line of bonus cases concerning disgruntled employees deprived of bonuses. Both of these cases raise novel and interesting legal arguments.

By way of a short recap, Clark v Nomura was a key, high profile bonus case, hitting the headlines in 2000. In that case, the High Court held that where employers had a discretion to determine whether a bonus should be paid, and if so, how much should be paid, that discretion must not be exercised ‘irrationally' or ‘perversely'. Continuing in this vein in 2005, in Horkulak v Cantor Fitzgerald International the Court of Appeal afforded further protection to employees by holding that discretion in a contract is subject to an implied term ‘that it will be exercised genuinely and rationally'. Mr Horkulak was entitled to a ‘bona fide and rational exercise by the employers of their discretion' in relation to his bonus entitlement.

The more recent cases of Keen and Takacs show how employees are pushing the boundaries of such case law. 

In Keen, the Bank had a discretionary bonus scheme. The bonus year was the calendar year and bonuses were to be paid in the following March. An express provision stated that Mr Keen would not receive a bonus if he was no longer employed or was under notice (whether given by him or the Bank) at the bonus payment date. When Mr Keen was made redundant in June 2005, the Bank did not pay him a bonus.

Mr Keen tried to rely on the Unfair Contract Terms Act (‘UCTA'), claiming that the bonus terms in his contract were unfair, but the Court of Appeal held that UCTA did not apply to employment contracts. Rather, the Court of Appeal held that the Bank was entitled to rely on the express provisions in the contract. Had there been no such provisions, Mr Keen may well have been entitled to a pro-rated bonus for the first 6 months of 2005. 

Keen is therefore a reminder of the value of bonus clauses that contain express provisions stating whether or not a bonus is payable on termination of employment. Good bonus schemes will state that a bonus will not be paid if the employee is not employed, is under notice, or subject to disciplinary proceedings at the bonus payment date. 

In the case of Takacs, the High Court was asked to consider whether contracts of employment should contain an implied term of ‘co-operation' and/or an implied ‘anti-avoidance term', making it unlawful for an employer to make it difficult, or impossible, for an employee to become entitled to benefits provided for by his contract, for example a bonus.

Mr Takacs' bonus was conditional upon him reaching a particular annual sales target. He argued that this target became impossible for him to achieve after a management restructuring undermined his position and the employer breached the above implied terms. The Court decided that it was arguable that such terms should be implied into contracts of employment but did not make a final decision on the matter.

Until a Court gives a formal judgment on whether terms like those raised in Takacs should be implied, employers should be aware that such arguments may be used against them. Our view is that if an employer terminates an employee's employment in bad faith to avoid paying a bonus, such a termination will be difficult to defend.

Category: Article