It’s bonus time.  No doubt, in addition to the numerous grateful employees enjoying champagne in the local wine bar, there are a number who feel that they should have been paid more and have written to you threatening grievances and the like, and even former employees and those under notice claiming that they should have been paid a bonus.

You may have dismissed certain employees before bonus day because you knew that they had no long-term future at your organisation.  After all, your employment contracts state that employees must be in employment (and not under notice, whether give or received) on bonus payment date in order to receive a payment?  But are you legally entitled to dismiss an employee merely to avoid paying a bonus, even if your contract says so?  Does the duty of trust and confidence supplement the terms of your employment contract meaning that you need a fair reason to terminate and avoid paying a bonus?

The recent Court of Appeal decision in Commerzbank AG v Keen has reopened the debate from the earlier cases of Jenvey v Australian Broadcasting Corp and Reda v Flag Limited as to whether or not an employer can avoid meeting its contractual obligations simply by terminating the employee’s employment.  Next month, the Court of Appeal is due to consider these issues again in Takacs v Barclays Services Jersey Limited.  Below is a summary of the recent case law, and some tips for preparing to dismiss employees around bonus time.

Jenvey v Australian Broadcasting Corp

Mr Jenvey claimed that he was entitled to receive a payment under the ABC contractual redundancy scheme.  Jenvey had been employed full-time under a series of fixed term contracts, but was requested to work part-time.  He refused and sought a statement of his employment particulars from the Tribunal.  The claim was settled on terms that Jenvey would work full time, but only a few months later, ABC terminated the fixed term contract four months early on the grounds that the position was no longer required in a full time capacity.

The Tribunal held that the dismissal was automatically unfair because it was due to Jenvey having brought the earlier Tribunal proceedings.  In addition, the Tribunal found that there was a redundancy situation and, therefore, Jenvey should receive a payment under the contractual redundancy scheme.  Because of statutory limits on compensation payments, Jenvey brought a claim in the High Court where it was held that an employer could not avoid liability under a contractual redundancy scheme by dismissing for another reason where there was, in fact, a redundancy situation.

The Court implied a term into the contract so that where there was a redundancy situation the employer could not remove the employee’s entitlement to the contractual redundancy payment without good cause (which is likely to be limited to fundamental breach of contract by the employee).  The employer was acting in breach by depriving the employee of a benefit at the point when the employee could take advantage of it.

Reda v Flag Limited

Mr Reda was a senior executive at Flag.  He was dismissed without cause in accordance with an express contractual term in his employment contract.  A few days later, Flag set up a stock option plan for senior executives. Mr Reda was unable to participate in this because he was no longer an employee, even though the plan had been approved a few months before he was dismissed.

The Privy Council decided that Mr Flag’s employment had been lawfully terminated under his employment contract and refused to qualify the employer’s right to terminate his employment by the implied term of trust and confidence.  In other words, the express right to terminate his employment should prevail so that the employer could deprive Mr Reda of the opportunity to participate in the stock option plan.

However, the Privy Council acknowledged that if Mr Reda had been “capriciously or arbitrarily singled out for dismissal” in order to deprive him of his entitlement to participate in the stock option plan, this may constitute a breach of the implied duty of trust and confidence.  This would entitle him to a contractual claim in respect of his non participation in the stock option plan.

Commerzbank AG v Keen

Mr Keen’s employment contract contained a clause which made it clear that he was not liable to be paid a discretionary bonus where his employment had been terminated or he was under notice on the date his bonus was payable.  Bonuses were normally paid in March, and Mr Keen was terminated by reason of redundancy in June 2005. Mr Keen sought to argue that he should have been paid a bonus for 2005 because the provision in his contract was unreasonable under the Unfair Contract Terms Act 1977 (UCTA), or because the Bank’s decision not to award him a bonus was irrational. The Court of Appeal held that:

  1. the relevant provisions in UCTA relating to reasonableness (which depend upon showing that the employee deals as a consumer) do not apply to contracts of employment; and
  2. a court will not interfere with the way in which an employer has exercised its discretion in terms of bonuses, unless an employee can show that his employer has acted irrationally.

However, the Court of Appeal did not decide whether there could be a breach of contract where an employer dismisses an employee before a bonus is payable so as to avoid liability for the payment.  Even though the Court of Appeal’s decision indicates that contracts mean what they say, it left open to what extent the implied term of trust and confidence must also be considered.

Takacs v Barclays Services Jersey Limited

As with Mr Keen, Mr Takacs’s performance bonus was payable providing he was still in employment, and not under notice whether given or received on the bonus payment date.  He did not achieve his targets and was dismissed without receiving a bonus.  Mr Takacs claimed that he did not receive a bonus because of Barclays’ actions, and that this behaviour amounted to a breach of the implied term of mutual trust and confidence, as well as an implied term of co-operation and an implied anti-avoidance term.

Barclays sought to have the claim struck out on the basis that it had no reasonable prospect of success.  However, the High Court agreed with Mr Takacs that the claim had a real prospect of demonstrating that Barclays should have co-operated with him to assist him achieve his targets.  In addition, the Court held that he had an arguable claim that an employer may not dismiss an employee merely to prevent him from being paid his bonus: that it is arguable that the implied term of trust and confidence supplemented and worked alongside the express term permitting termination, rather than being inconsistent with it.

The case is due to go to full trial next month, and we must wait and see whether an employer will be in breach of the implied term of trust and confidence by failing to pay a bonus in reliance on an express term in the contract.

Summary

Currently, employers can avoid bonus payment liabilities by terminating employment (providing that their employment contracts give them the right to do so).  However, if an employee can show that the employer did so irrationally or in bad faith, it is arguable that they should be paid a bonus in any event.

While the law is in a state of flux, employees whose employment is terminated close to bonus payment date will increasingly seek to argue that they were sacked purely to deprive them of that bonus.  It is relatively cheap to bring a claim in an employment tribunal (it is free if the employee does not instruct a solicitor), and so some will bring tribunal claims in the hope that their employer will settle the litigation rather than have an unfavourable judgment against them – which could lead to the floodgates being opened with respect to other employees who are dismissed in similar circumstances.

Top tips

Employers must get their ducks in a row before dismissing employees close to bonus payment date if this means that no bonus will be payable.  It is recommended that they carry out the following due diligence before terminating employment.

  1. Check the contract:-
    1. Ensure that the correct mechanism for giving notice is used.  If the termination is unlawful (because insufficient notice is given, or a payment in lieu of notice is made without the contractual right), the employee may be able to recover his bonus as damages for breach of contract.
    2. Does the contract state that bonuses are discretionary, and only payable providing that the employee is employed and not under notice on bonus payment date? If not, your hands are tied when it comes to paying bonuses.
    3. Is there a PILON clause?  Are bonuses included in such payments?  If so, it is payable.  A well drafted PILON clause will limit payment to basic salary only.
  2. What is your reason for dismissal?  It is preferable to have a statutory fair reason (redundancy, capability, conduct or some other substantial reason), so as to make it easier to justify the decision to terminate.  If you have a good reason, explain it to the employee in writing.
  3. Is there time to follow a statutory process? If so, do it!  Terminating employees unexpectedly not only demonstrates poor employee relations, but it is automatically unfair and, crucially, adds weight to any allegation that the dismissal was done merely to avoid paying a bonus.
  4. Lay a paper trail.  Make sure you have evidence of the decision making process. Are there minutes of discussions about your reasons for wanting to get rid of a poor performing employee shortly before bonuses are paid?  Do you have emails between disgruntled managers and HR?  Is there evidence that performance figures were down and no bonus would have been paid, even if the employee had remained in employment on bonus payment date?

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