By Darren Clayton, Doyle Clayton Solicitors, London


Bonus woes



A few years ago I advised a depressed-looking young man who had stumbled in from the City for a chat.



Shaking with indignation, he explained that he believed he had been constructively dismissed following a 'derisory' bonus payment. He adopted the view that this conduct was calculated to damage the relationship and compel him to leave the City. The amount &150; some £750,000 &150; was the lowest he had received in the last three years since joining the company (then aged 21). His colleagues, he reckoned, had received something more nearly resembling the national debt of a South American country.



In short, he was down to his last Porsche. My heart bled.



However, the man in question had a serious point. Regardless of the amount of the bonus and his age, he was clearly 'reliant' on these bonuses, as they formed the larger part of his remuneration. Indeed, he could have earned much more elsewhere, and in this case would have left earlier in the year had he known. Yet the bonus scheme in question was largely undocumented and was stated clearly to be 'discretionary' to the extent it was in writing at all.



Some remedy for the young man's pallor was potentially on hand through cases such as Horkulak v Cantor Fitzgerald [2005] ICR 402 and Clark v Nomura International Plc [2000] IRLR 766. These were at least authority for the proposition that, while a company may seek to exercise an express right of discretion, it must not do so 'capriciously' or 'perversely', as seemed to be the situation in this case.



However, while he genuinely believed that no reasonable employer would have paid such a paltry sum in these circumstances, the issue remained as to whether a decision to allocate him the sum of £750,000 from a bonus pool could really be said to be perverse. In the prior year, he had received closer to £1 million; a large difference, but in relative terms was that sufficient?



This was one of several connected points considered by the Court of Appeal in November in Commerzbank AG v James Keen [2006] EWCA Civ 1536. The case, dealing with an appeal against a failed application for summary judgment, combined our question as to what would amount to a perverse or irrational decision in the discretionary allocation of a bonus pool with an often connected question: what should happen if the employee were to leave employment part way through a bonus year?



Mr Keen had sued the bank for breach of contract in failing or underpaying discretionary bonuses. He had been employed for three years but was made redundant in 2005. Like our young man, his bonuses were a substantial part of his remuneration and he had received significant bonuses in 2003 and 2004 &150; just under ¤3 million (£2 million) in each year.



However, these bonuses were not payable until the March of the following year. The scheme provided expressly that decisions as to whether to award a bonus, the amount, and its timing were 'at the discretion of the bank' (although some factors were illustrated, such as the bank's performance). The scheme also adopted the clear term that no bonus would be paid if, at the date of payment, the employee were not employed by the bank or were under notice to leave. Mr Keen had left part-way through 2005 and had not been paid a bonus in that year at all.



He claimed that the exercises of discretion in calculating his bonuses for 2003 and 2004 were irrational or perverse, in particular given a recommendation of his immediate manager that he should receive even more than he did. He also submitted that he should have received a bonus for 2005, as he had worked part of the year before being made redundant, and that while the contract purported to allow this, the relevant provisions should be regarded as an unlawful term contrary to section 3 of the Unfair Contract Terms Act 1977 (UCTA).



In some darkened quarters, it has remained the view that UCTA could apply to employment contracts despite the need for it to be said, however artificially, that the employee dealt with his employer as a 'consumer' (see Brigden v American Express Bank Limited [2000] IRLR 49, per Mr Justice Morland.) Noting that there were no authorities binding on the Court of Appeal, the court nonetheless reached its own conclusion and, for now at least, it can be said to be clear that an argument that UCTA applies to the principal aspects of an employment relationship has no reasonable prospect of success &150; since employees do not deal with their employers as consumers. This is sensible enough. (But the court did accept that there might be aspects of employment relationships that could be seen as a consumer relationship, for example in relation to the purchase of discounted goods from an employer as a perk.)



Further bad news for Mr Keen came as the court decided that the claim that the bonus pool decisions for 2003/04 were irrational or perverse faced difficulties he was unable to surmount. Here, as with my young man, the bank had broad discretion and the court took time to emphasise that the test of showing that no rational bank in the City of London would have paid a lower bonus than the line manager recommended was a high one. In short it would require an 'overwhelming case'.



But is all hope lost? Some remains. First, the court did consider in obiter that there might be a case for repudiatory damages if the employer had dismissed an employee just before the bonus due date to prevent him from getting it. Equally, should a dismissal be unfair, for those not expecting to buy an Oompa Loompa for the kids with their annual bonus, a tribunal may take the loss of a bonus into account when considering a compensatory award.



However, with the perceived raising of the bar in the Horkulak cases, the obligation of 'mutual trust and confidence', and the hope of arguing constructive dismissal successfully when such meagre bonuses are paid, might be said to have taken a bit of a battering in all but the more extreme cases.



So at this bonus time in the Square Mile, join with me in raising a glass to the underpaid of the City. May all their employers' 'perverse' decisions be found to be perverse and may all their Porsche 911s be golden.