Bonuses

We are approaching the time of year when bonuses in many industries, including financial services, are being declared and paid to employees. Historically, US firms have paid these in the December in the year to which the bonus relates, while non-US firms have paid these in March of the following year.

Many employees accept at face value the wording relating to their potential bonus entitlements contained in their employment contracts (drafted by employers). This is often along the lines that the award scheme is “entirely discretionary”, or “at the employer’s absolute discretion”, or similar. Employers like this wording because it makes them feel safe, and leads employees to believe that the employer will not be accountable for any awards withdrawal or allocation.

Fortunately for employees, despite what the contract states, this is not strictly true. The Courts have long determined that although employers do have discretion in the allocation of bonuses, that discretion must not be applied irrationally or capriciously. Effectively, it is not an unfettered discretion and any award must be capable of justification.

A practical difficulty for an employee who considers that they have received an unfairly low bonus award, remains. The fact, and size, of a bonus is usually stressed by the employer as being confidential, and employees are prohibited from disclosing information to any other employee in relation to it. How then, does an employee who considers that they have been allocated an unfairly low bonus, determine if this is the case without being in a position to compare their award to other colleagues?

Although an employer would generally have to disclose such information if it was defending a legal claim in relation to this, it does not have to do so in most other circumstances, such as a formal grievance. It thus makes a decision to pursue a claim in the Courts problematic for a disgruntled employee as they will not be in a position to know the size of their peers’ awards at that stage, and so know whether they have been disadvantaged in their own bonus award.

Recent case law in this area is both helpful and unhelpful for an employee minded to challenge the size of their bonus in the Courts. To be successful, they must overcome the high evidential bar set by the Court in Commerzbank v Keen AG [2007] ICR 623 requiring them to demonstrate an “overwhelming case” of irrationality by their employer in the award decision.

More helpfully for employees, in Braganza v BP Shipping Ltd [2015] UKSC 17 the Court determined that they (the Court) had the right to look into the decision-making process (such as whether the correct issues were taken into account) as well as to determine the reasonableness of the award even if the correct issues were taken into account. Less helpful for an employee is the benchmark that is required for an award to be deemed unreasonable – that it was one that no reasonable decision-maker could have reached.

It can be seen that to successfully defend a claim for an unfairly low bonus if challenged in Court, an employer must adduce evidence of rationality in relation to the decision-making process, in addition to the rationality of the award itself. Although Braganza-based arguments will give employees more ammunition to challenge discretionary bonus decisions, it only takes them so far, as the evidential hurdle of “irrationality” in respect of their bonus award that they must overcome, remains high.

Meaby & Co are lawyers experienced in the financial services field in respect of employment issues. Should you require advice on any aspect of employment law, including the above, please contact Chris Marshall or Steven Eckett on 0207 703 5034.