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Bonuses – the end or just the beginning?Bonuses – the end or just the beginning?

» Posted on: 16 September 2009
» Posted by: James Bellamy
» Service area: Employment

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The public outcry against the city bonus culture continues following the most recent news that city bankers of the Dresdner Kleinwort bank are suing the bank for unpaid bonuses worth £30m.

Whilst it is easy to join the overwhelming criticism against such bonuses and further support the government’s attempts to try and prevent such payments being paid (especially as the taxpayer is now a major shareholder in a number of the employers paying them) the banks are in a difficult legal position!

Failure to pay a bonus entitlement expressly set out in a contract of employment entitles the employee to claim damages for breach of contract. Bonus entitlements are, however, often worded to be “discretionary”. In theory, you might believe that the employer would be able to pay or withdraw such bonuses as and when they see fit. However these matters are rarely that straightforward.

A case concerning an employee of Boots the Chemist held that labelling a bonus scheme as “discretionary” does not in itself mean that it has no contractual effect. Rather, a careful analysis of the bonus scheme is necessary and account should be taken of its previous history and detailed consideration of its wording. For instance, bonuses can be awarded for loyalty, performance (relying on strict criteria laid down by the employer) or on the company’s performance being profit-related, etc. Furthermore. it was held that even though the bonus is described as “discretionary”, the employer does not have carte blanche to pay a nil bonus and any decision not to pay a bonus or to pay a reduced bonus must be done rationally by the employer and in good faith.

Essentially, therefore, in order to avoid any claim, the employer must set out reasons to the employee that have clearly been considered and that are rational as to why they are not being paid a bonus or one that it is below the level they were expecting. Failure to do so may result in a claim for damages as well as a constructive unfair dismissal claim.

Bonus schemes therefore need to be carefully drafted. They should:

  1. detail whether the scheme is contractual or discretionary;
  2. set out how any such discretion is to be applied;
  3. set out clear, identifiable/quantifiable targets or objectives
  4. set out how the bonus will be calculated if objectives are achieved;
  5. provide for feedback at the end of the financial year;
  6. be reviewed each year to determine their continuation/new objectives; and
  7. be applied equally to both male and female employees to avoid claims for equal pay and sex discrimination.

For assistance in drafting or reviewing your bonus schemes or to discuss any other employment matter, contact Taylors’ Employment Team:

Oliver McCann (Employment Partner) – 01254 297930, oliver.mccann@taylors.co.uk
James Bellamy (Employment Solicitor) – 01254 297914, james.bellamy@taylors.co.uk

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