Bonus schemes - take the time to get them right
07/10/2010
By Nick Hobden, Partner and Head of Employment
It is quite common for the courts to hear claims from employees, arguing that their employers have breached an implied contractual term by exercising their discretion in awarding bonuses. But the case of Rutherford v Seymour Pierce Ltd differs in that it was the employer who argued the existence of an implied term to prevent a dismissed employee receiving a bonus.
The facts
Rutherford (R) was employed by Seymour Pierce Ltd (SP) until he was summarily dismissed in November 2007. His contract entitled him to three months' notice. It also stated that:
"you will be eligible to participate in the company's discretionary bonus scheme. Any bonus payments or amendments made to the scheme are at the discretion of the company".
SP's bonus scheme created a pool of money which was distributed in two parts: the first at the end of the third quarter of the financial year and the remainder in December, three months after the end of the financial year.
During R's last year of employment, he had received the first bonus. But as a result of the termination of his employment, he did not receive the second bonus payment. R launched an unfair dismissal claim which was settled by a compromise agreement. The agreement, however, failed to mention his entitlement to a bonus. This left the door open to a breach of contract claim, which R duly brought.
At the High Court
SP argued that there was an implied term of the bonus scheme which said that in order to be eligible for the bonus, an employee had to be employed and not under notice of termination at the date of payment. The High Court considered SP's argument, but rejected it for the following reasons:
- It was not necessary to imply the term in order for the contract to 'operate satisfactorily'. Despite the contract's silence on the matter, there was no need for an inflexible rule precluding any possibility of payment.
- It would be unfair to allow SP a right simply to dismiss an employee the day before the bonus payment date, in order to avoid payment.
- SP's argument that it went without saying that this was a term of the contract was undermined by the company amending its contracts to include an express term precluding bonus payment where the employee had left or was serving his notice on the payment date.
- The argument that such a term was 'notorious, invariable or certain' in the City of London was not supported by any evidence.
The judge also acknowledged that while the majority of those leaving SP did not receive a bonus, there were a few who did. This showed that there was no automatic bar on such payments.
Of course if R was entitled to a bonus, the question arose as to how that should be calculated. SP argued that no bonus would have been paid to R even if he had remained in their employment because of his poor performance. However, no allegations of poor performance were made to R during his employment or when he was dismissed. The judge also indicated that many of the allegations of poor performance advanced by the company were trivial or unfounded. The employee's bonuses of £50,000 in the previous two years were considered in conjunction with his increased responsibility in his last year. The judge awarded him £70,000.
Conclusion
The outcome in this case is not a shock. The lack of evidence presented by SP to back up its assertions about normal practice contributed heavily to its downfall. But what this case underlines is the level of detail required in employment contracts, when addressing the difficult issue of bonuses. It is not enough to assume that a term will be implied into a contract to clarify what, in retrospect, an employer wishes the contract to say. Employers who wish to ensure that bonuses are not paid to employees who are dismissed or serving notice should include an express written term in their contracts stating as much.