Don't Write-Off Your Right To A Bonus
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'There’s recently been an unprecedented amount of comment expressed by various parties in relation to banker bonuses, which have clearly now become something of a political ‘hot potato’.
And, as a large number of firms have significantly cut back, or cut out altogether, Protected content , many bankers are having to come to terms with dramatic cuts in their standards of living. Not every banker, however, will need to take all this laying down - it's important to examine whether an employer is actually entitled to withhold a bonus, and is able to effectively change the rules of the game.
This is usually an absolute entitlement as it is set out in an employment contract. It is very difficult for a bank to evade responsibility for payment of such bonuses without being at risk of a breach of contract claim.
There are a variety of discretionary bonus clauses, but a typical one might say: 'the company may in its absolute discretion pay the employee a bonus of such amount at such intervals subject to such conditions as the company may in its absolute discretion determine from time to time'.
The myth around this type of bonus is that a bank's decision not to award one cannot be subject to a legal challenge. The law does, in fact, provide disgruntled bankers with ammunition to question the use of the discretion not to award a bonus - but subject to the provision that the banker can prove that such a decision was not 'perverse irrational or arbitrary'. And there have, in fact, been a line of higher court decisions which set-out how a bank is required to operate when going about exercising its discretion in relation to bonuses. Importantly, a Protected content , Commerzbank V Keen, says that the employer must give reasons for the exercise of his discretion to pay or withhold a bonus and to identify who made the decision. Reliance on this case is a good tactic when, for example, dealing with a bank that has not applied bonus awards on a consistent basis, or in a transparent manner.
And there are many other legal means by which a banker may wish to challenge his employer's decision regarding bonus. These include the use of the quantum meruit principle, unjust enrichment and the Apportionment Act. These have not really been tested, yet but provide interesting potential grounds for further challenges.
The Position Mid-Credit Crunch:
The situation mid-credit crunch is clearly an evolving one. The quasi nationalisation of banks by the UK government has resulted in public pressure for more 'accountability' in relation to bonuses. However, under English law, the position is simple - a contract of employment cannot be varied without the consent of both parties. A bank cannot put pressure on an individual to agree to forgo his (or her) right to a contractual bonus, as this would entitle the banker to sue for breach of contract.
Bonuses & Being Made Redundant
What also appears to have happened recently is that many investment banks have decided not to award bonus payments to bankers who they are making redundant. In contrast, many of those who remain in the bank's employment are rewarded handsomely. This inconsistency can give rise to potential claims.
Laid-off bankers are often given compromise agreements offering them what tends to be the bare minimum contractual, or statutory entitlement, sometimes with an additional sweetener. Many decide not to challenge their employers simply because they need the cash, and urgently. Others are simply not aware of the potential challenges that can be mounted against their employer. Many are also worried that, because of the negative press bankers have been recently receiving, the courts will not have much sympathy with their plight. However, the fact is that the judges will have to continue applying the law as it is without being influenced by the general atmosphere in the country.
Our advice to bankers is that each case is different. The mere fact that a banker is included in a collective procedure, or an individual redundancy process, does not deprive him of the right to challenge his (or her) bank regarding its failure to award a bonus. The individual banker must, however, ensure he takes advice from a lawyer who has experience in dealing with financial markets compensation packages, and is aware of the intricacies of the rules relating to bonus claims.
Sharokh Koussari is a Partner at Matthew Arnold & Baldwin
Sharokh. Protected content