Paying
reduced or no bonuses
Refusing
to pay a bonus, in full or in part, might under some circumstances give raise
to legal disputes. This can be in general averted by means of properly and clearly
communicating to, and agreeing with, individuals the rules on the basis of which
the overall bonus programme has been introduced and is thus managed. Notwithstanding,
in some instances, especially in those in which a specific agreement has been negotiated
and reached between an employer and the individuals filling particularly significant
roles, the risk of litigation can be potentially higher and disputes trickier
to manage and resolve whether brought before a court.
The
source of a bonus payment: express or implied terms?
Express terms
The
payment of a bonus, as all of the other terms and conditions of employment, may
be provided for either in writing in the employment contracts and written
particulars or verbally.
Despite
the written form of a bonus agreement might not be required ad substantiam, meaning by that that the
written form might not be considered necessary for the validity and
enforceability of the agreement, the practice of invariably subscribing a
written document with employees can definitely help employers to solve the disputes
eventually arising at a later time. A written document, albeit not required ad substantiam, can in fact invariably
be used ad probationem, that is, to
provide evidence of the terms and conditions agreed between an employer and its
employee and to prove that the employer made a specific and precise offer to
the employee and that this accepted it as formulated by the employer in the
written document.
In
case of litigation, the main document and source of information is invariably represented
by the contract of employment. Whether this should contain a clear and unequivocal
entitlement to the payment of a bonus, this would be clearly fully considered
part of the express terms and conditions of the contract of employment.
What
in general typifies the express terms of employment, that is to say their
distinctive characteristic, is that these have been explicitly discussed in
details between an employer and an employee and hence agreed and accepted by
both parties. These terms become thus legally binding for both of the parties
involved. The formulation used in the contract of employment to entitle an
individual to a bonus payment is and must be considered by employers as extremely
important (Gannons, 2011). As a general rule, whether an employer aims at keeping
a degree of latitude as regards the payment of a bonus, this should avert phrasing
the bonus clause in a way which entitles individuals to receive the bonus
payment under any circumstances. The caveat should rather be formulated in a
way enabling the business to retain the latitude and right to pay the bonus
fully or in part considering the circumstances.
Staff handbooks, e-mails and notice boards,
albeit not necessarily having a contractual and hence legally bounding status,
can contains information which may be used by the court to decide the way to resolve
a dispute. Employers and the business management should consequently take extra
care when devising these documents and writing whatever type of letter and
note.
Are
deemed implied the terms of a contract of employment, which albeit overlooked
and not explicitly agreed at the moment of starting the work relationship, are considered
necessary to regulate the matters not covered by the written documents and
hence essential to integrate and complete these. The tenet on the basis of which
a court will eventually establish an implied term is that whether this should
have been discussed by the parties it would have been agreed in a certain way, consistently
with their presumed intentions.
According
to the UK law, the most relevant implied terms to the extent of a bonus payment
are: “mutual trust and confidence” and “not to act arbitrarily, capriciously or
inequitably.” In order to establish whether an alleged implied term may be
considered as such, the courts are also very likely to attach a high degree of
importance to the practical conduct of the parties.
Cases
in which an employer can pay a reduced or nil bonus during employment
According
to the implied term on the basis of which an employer should not act
arbitrarily, capriciously or inequitably there are basically two factors which
can restrict an employer’s latitude to pay, fully or in part, annual bonuses,
to wit: the incapacity of the company to explain and sustain its decision not
to pay a bonus and the breach of discrimination law.
Whether
a firm’s decision not to pay, or pay a reduced amount of the agreed bonus,
should be supported by rational and convincing arguments (the employer has therefore
acted neither arbitrarily nor capriciously), as emerged from the UK court case Clark
v Nomura International Plc. (2000), it is unlikely that the courts may impose a
business to pay an employee the full bonus. With reference to this aspect, a court
decision may be based, for instance, on the assessment of the overall business performance
and actual circumstances. Despite an individual has objectively performed well
in fact the payment of the bonus might be in contrast with the current financial
state of the business. In Europe, this tenet is provided for by the Capital
Requirements Directive no. 3 (CRD3) promulgated with respect to the financial
sector organizations; observing this principle, nonetheless, can undoubtedly
reveal to be useful for all the employers irrespective of their industry
(Gannons, 2011).
The term
discretionary needs indeed to be fully explained and the degree of its
application clearly identified. The importance of this tenet actually emerged,
in the UK, from Small and Others v The Boots Co. Plc. and Boots UK Ltd. (2009).
The Judge of the EAT considered “ambiguous” the generic use of the adjective
discretionary in the documentation provided by the Respondent, considering that
it could have been referred either to the decision whether to pay a bonus at all
or to its calculation method or to its amount or to other factors or to all of
these aspects considered together. Simply defining the bonus as discretionary
is not hence sufficient to determine the degree to which an employer’s
discretion applies.
Despite
in the employment contract it has been clearly stated that the bonus payment is
discretionary, this precaution may not suffice to totally protect the employer
from the consequences of possible claims. As discussed earlier, expressing in
the terms and conditions of employment that the payment might not be made,
either in full or in part, may prove not to be enough whether the circumstances
to which the employer refers to in order to justify the non-payment are not
sustainable and rational. In essence, what matters the most in order to support
an employer decision not to pay a bonus, in addition to having clearly detailed
the cases in writing, is the employer’s ability to prove that its decision is
consistent and coherent with the financial situation of the company, the
current circumstances and the employee actual performance and contribution.
In Ridgway v JP Morgan Chase Bank National Association
the court held that the “nil bonus” awarded to the Appellant was consistent
with the circumstance that the employee had made losses, rather than providing
income for the bank in the year considered for the bonus payment. The Appellant
had actually applied and been authorized by the bank for a sabbatical year from
April 2003. The bank did not pay any bonus to the Appellant providing evidence that
the decision not to pay was made on the basis of the Appellant performance during
the period he was working in 2003, whereas related by no means to his absence.
In
order to meet the implied term not to act inequitably employers’ bonus payment
decisions must not be made on the grounds of discrimination-related reasons
either. Gannons (2011), to this specific respect, stresses the importance of
considering the circumstance that discrimination based on nationality, as all
of the other forms of discrimination, is protected by regulations, namely race
discrimination law; this entails that foreigner businesses based in a given
country cannot pay home country employees higher rates than local employees.
An
additional important tenet emerged from the UK’s jurisprudence relates to the so-called
anti-avoidance term. The expression anti-avoidance refers to the circumstances
in which an employer might decide to make, to put it mildly, not completely
correct and transparent moves in order to avoid complying with some employment
terms. As contended by Cabrelli (2007), the anti-avoidance term in the UK
mostly emerges from the employers’ authority to dismiss employees and enable thus
organizations to withdraw contractual benefits according to the changing
circumstances. In Takacs v Barclays Service Jersey Ltd emerged that the Appellant
in mid-November 2004 had not yet met his objectives, he was hence dismissed
with a letter sent to him on November 15th stating that his contract
of employment with the Defendant would have been terminated with effect 13
December 2004. No bonus was thus paid to the Appellant who claimed hence the
Defendant’s breach of the implied trust and confidence, anti-avoidance and cooperation
terms. The Appellant also claimed a sum of money considered, pursuant to the
contract, as a “guaranteed minimum capital EPP award.”
The
High Court of Justice held that the Claimant might have had real chances to
succeed and the case to proceed therefore to full trial. The parties however
settled the dispute one year later prior to the case to be brought before the
court.
Payment
of a bonus during notice period and after employment termination
The circumstance an employee might leave the
organization soon after or just before the date set for the bonus payment
definitely represents a rather particular, bur realistic eventuality. To avert
employers being prompted to erratically deal with such circumstances, it is
definitely better to provide details in the employment contract of what it will
happen should these cases arise. This may clearly help employers to prevent
claims but might not necessarily suffice: the courts might in fact consider
employee entitlement to the bonus payment to be effective whether this has
fully attained his/her objectives and the business is in the position to honour
its pledge.
In
McCarthy v McCarthy & Stone Plc. (2007), nonetheless, the court held that
whether an employee has met his performance objectives as detailed in the
firm’s employee share option programme, the employer has no more latitude to
decide whether to pay or not to pay the bonus, albeit an employee may be
dismissed for gross misconduct. The Judge, nonetheless, also held that a bonus
clause expressly regulating this circumstance would have actually enabled the
employer to refuse the payment of the bonus.
An
employee might be indeed considered to still hold his right to the payment of a
bonus in those cases in which s/he has been dismissed for having breached a
contract term, not only for the part of the bonus accumulated at the time of
dismissal, but also for the part of the bonus this would have received whether
still working during the notice period. In general, whether a contract
encompasses the “payment of a sum in lieu of notice” (PILON) clause, and the
employer counts on this clause to eventually terminate a contract of
employment, the cases of a bonus payment and of its refusal during the notice
period should be detailed in the clause (Greenberg Traurig Maher, 2011).
Also
in this case, the appropriate wording of the clause would have certainly helped
the employer to better manage the issue. However, the doubt that the
anti-avoidance implied term was actually breached by the employer remains. The
FILON express term was in fact used by the employer to invalidate another
express term of the written contract, that is, the one concerning the payment
of a particularly generous bonus to the Appellant. This would have been paid to
the Appellant only whether this would have been employed by the firm after
twelve months; but this condition was not met because the Defendant exercised
its power or prerogative to apply the FILON clause to the detriment of the
Appellant who undergone it.
Each
case is clearly different from the others and details sorely count. In Reda v
Flag, for instance, where two senior executives were dismissed by their
employer to allegedly exclude these from the benefits of the company stock
options programme, the court held that according to the terms of the Claimants’
contract the employer had the right to dismiss these for any reason, albeit by
doing so the employer would have put itself in a position not to pay them the
sum linked to the company stock options programme. In this instance, the lack
of ambiguity and a carefully written contract of employment and particulars
enabled the employer to be successful. Yet, as properly stressed by Greenberg
Traurig Maher (2011), since the Appellants had claimed that the employer’s tactic
had represented a breach of the implied duty of trust and confidence, this case
also shows as a properly devised contract of employment can enable employers to
protect themselves against the potential consequences of some implied terms.
Organizations should be aware that after a bonus
has been paid to an employee the chances to claw it back, if any, are very
limited. The most likely circumstance under which a bonus payment can actually
be clawed back is when the employee has breached a post-termination pact. The
seminal case is represented by an employee breaking the terms of a restrictive
covenant agreement. Other cases in which employers may claw bonus back are
those in which these can prove that the objectives set for the bonus payment were
attained dishonestly or that the employee has voluntarily altered the facts or
data on the basis of which his bonus has been paid.
The
legal aspects associated with bonus payments are indeed many-faceted and the
best way to prevent problems to arise is do everything it is possible to do
beforehand, prevention is definitely better than cure. Reward managers and employment
law specialists should hence work in close collaboration to formulate a
thorough, detailed and consistent clause concerning the payment of the bonus,
trying to regulate all of the possible cases they may be potentially prompted
to deal with in the future.
Varying
schemes and bonus terms and conditions
With
the exception of some statutory terms, each term of a contract of employment
once agreed and accepted by the employer and the employees can be changed only
with the consent of both parties. Whether an employer should change
unilaterally a term previously agreed with an employee without his/her consent,
this variation will be considered unlawful. To this respect, nonetheless, gains
particular significance the practical behaviour displayed by the parties, which
is indeed used to determine whether a contractual term or its variation can be actually
considered as an implied term. Whether the employee does not object to the
variation implemented by the employer and adapts his/her behaviour to this, the
term is considered accepted by the employee and changed by conduct. This
basically represents the flip side of the same mechanism, bonus schemes
implemented for years by employers initiative, albeit not being part of any
express terms, are accepted by individuals who receive the sums of money and
become as such legally binding for the employer.
It
clearly emerges that the existence of a bonus scheme within an organization can
pose legal threats to an employer also when this would like to introduce
changes in the existing programme. In such instances, changes could be
considered by employees as a breach of the current terms and conditions. Before
introducing amendments to a bonus scheme employers should hence ensure that
these are consistent with the current employment terms and conditions and do
not entail any substantial modification of these (Brettle, 2003).
Whether
individual entitlement to a bonus payment is explicitly included in the written
contract of employment, this can be modified only with the mutual consent of
both parties. The agreement may be either expressed in writing or emerge by
conduct. Employers need hence to be aware of the way the scheme is actually
operated and executed. The mechanism of the scheme as initially agreed might
also change in practice over time and the new resulting mechanism considered by
employees as having replaced the original or previous one.
The
first thing to do before changing the terms of a bonus programme is therefore
inform the employees concerned. Whether a bonus scheme has been operated for a
number of years employees would take it as axiomatic that it will continue to
be operated in the same way. The importance of this implied, by conduct term
emerged from the court case Quinn v Calder (1996) where the employer had
operated a bonus scheme which albeit not included in the express terms of the
contract of employment was considered as such by the employees in that it had
been consistently executed over the years. The court held that individuals
continue to be employed considering the bonus as part of their terms and
conditions and that the employer was aware of this circumstance. In essence, the
by conduct term is in this case based on the making and the acceptance of a
bonus offer.
This
tenet actually applies irrespective of the circumstance that a bonus has been
offered and accepted in writing. In Noble Enterprises Ltd. v R. L. Lieberum (1998)
it come out that albeit the bonus payment had not been agreed as an express
term (with the exception of 1994, when a written document was actually produced
by the employer to regulate the bonus programme), the bonus scheme had been
operated by the employer for a number of consecutive years, namely from 1992 to
1997 when the Appellant left the organization. The EAT therefore upheld the
Employment Tribunal conclusion that the scheme had to be considered as contractual:
it had been operated for several consecutive years, employees could exactly
calculate the amount of their bonus and each of them worked knowing that a
bonus would have been paid to award their efforts. The court also held that
since the scheme was effective also the Claimant had the right to receive the
bonus payment. No documentation or information was in fact provided to the
Appellant to notify him of having lost his right to the bonus payment. The Appellant
was hence expected to be awarded the bonus as it had occurred during all of the
previous years of employment.
Employers
should timely inform the employees concerned, at least before the beginning of
the period of time with reference to which the bonus payment decisions are made,
of the circumstance that the bonus scheme cannot or will no more be operated.
This is extremely important to: ensure employees transparency, prevent individuals
to establish unrealistic expectations, avert to cause employee disappointment
and ultimately to have more chances of success should the case be brought
before a court. When communicating employees the elimination or variation of
the current bonus scheme transparency and timeliness may definitely prove to be
of paramount importance. Employees can redress their expectations accordingly
and not perceive the change made by the employer as breaching the pact
previously agreed, psychological contract included.
Employers
should indeed carefully consider the potential breach of the implied duty of
trust and confidence also when varying the current bonus scheme. Individuals
affected by the programme change could potentially claim that the variation
unilaterally implemented by the employer in the scheme has seriously jeopardized
the relationship of mutual trust and confidence existing between them. An employee
may in fact claim that the employer has engaged in such a tactic just to force
him/her to resign. Under such circumstances, it is very likely that the
employee may claim a constructive dismissal. The change implemented by the
employer would be certainly considered as detrimental by an individual as to
let this perceive that the implied mutual trust and confidence term has been
irreversibly breached and that s/he has no option but to resign.
As
contended by Brettle (2003), in the UK an individual entitled to claim
constructive dismissal may also claim unfair dismissal against the
organization. Most importantly, whether the court should establish and recognize
the constructive dismissal, this implies that the employer has breached all of
the contractual terms. In such instances, also the express terms, like the restrictive
covenants, would be considered unenforceable.
Before
implementing any changes to a bonus programme employers should invariably
inform and consult with unions or workforce representatives to explain the
reasons behind the bonus cancellation or variation and give apparent, thorough
communication of that to the entire employee population. This information will prove
that the employer did whatever he could to modify or cancel the programme with
the staff agreement and that the organization was acting with transparency and in
good faith; it could hardly be argued that the employer breached the implied term
of trust and confidence. This attempt will also provide evidence that the employees
were informed of the employer intent to vary the programme before changes were
actually implemented.
Whether
a new agreement should be reached between employer and employees it is good
practice to let the latter sign a waiver letter to be attached to the original
agreement or policy to prove that the amendments were actually implemented with
the consent of both parties (Brettle, 2003).
