Recent statistics support the view that bonuses are now an integral part of any reward package, rather than an additional extra. A report from the Office for National Statistics showed a 16% jump in bonus payments to £19bn, the majority of which is paid to those in the financial services industry, particularly in the City of London. Pricewaterhouse-Coopers also stated in a recent report that fewer executives at FTSE 100 companies now went without a bonus. Faced with the size of bonuses and the increasing number of court cases shadowing them, in-house legal counsel could be forgiven for feeling a little anxiety over the issue.
The recent case of Takacs v Barclays Services Jersey [2006] is particularly concerning because of another application of the contractual term "mutual trust and confidence" implied in all contracts of employment. This case has only gone to a preliminary hearing so far, but many legal counsel will wait for the full trial with bated breath.
The law has changed significantly since the case of Lavarack v Woods [1967] where the employer was able to avoid paying a discretionary bonus on the basis that it was entitled to perform its side of the contract with as little cost to itself as possible.
Clark v BET [1997] and Clark v Nomura International [2000] were two cases which indicated that employers could not be "irrational or perverse" when considering bonuses. The test was whether "any reasonable employer could ever come to the same conclusion" in withholding a bonus.
Mallone v BPB Industries [2002] confirmed that an employee did not need to prove dishonesty or improper motive, merely that the employer behaved irrationally.
In other areas, "trust and confidence" can even prevent employers from dismissing employees, such as those employees with permanent health insurance, as in Aspden v Webbs Poultry [1996], and enhanced redundancy terms, as seen in Jenvey v Australian Broadcasting Corporation [2002].
Takacs involved an investment banker with potential bonuses based on the value of the credit facilities he was able to complete. He failed to reach the sales target and was ultimately dismissed. He failed to convince the court at a preliminary hearing that he was entitled to a payment of bonuses on the express terms of his contract. However, he is continuing to claim the bonuses on the grounds of breach of the implied term of trust and confidence, breach of the implied term of cooperation and ‘anti-avoidance’.
Takacs argues that because Barclays carried out a management restructuring, hiring a senior executive and a 40-strong specialist team from Credit Suisse First Boston, his position was undermined and they muscled in on his deal and prevented it from happening. If successful, this could mean that employers are limited in the way that they restructure their operations.
Barclays is seeking to argue that the credit deal, which would have meant Takacs achieving his sale, was closed down on risk grounds. Takacs contends that the deal was progressed after he was fired. If Takacs’ argument is successful, this could mean that employers are limited in their ability to further their own interests (e.g. risk management) if they conflict with the duty to ‘cooperate’.
Takacs’ final argument is that in dismissing him, Barclays did so to avoid having to pay his bonus. This is an argument along the lines of Aspden and Jenvey.
Legal counsel should consider carefully the wording of bonus plans. There are a number of options to consider.
. Including express wording that participation in a bonus scheme does not limit the employer’s ability to dismiss an employee on giving appropriate notice and dismissal will not give rise to an entitlement to payment under a bonus plan.
. Wording stating that participation in a bonus scheme does not limit the employ-er’s ability to structure its operations in any manner it sees fit, even if this has a detrimental impact on an employee’s ability to achieve his bonus.
. An express clause stating that an employer has an absolute right to prevent a sale on which a bonus is based, without compensation, where this conflicts with the employer’s interests.
John Keith is an associate in the employment team at Shoosmiths.
