Takacs – Potential New law could be a real bonus for employees. Can employers sack employees to avoid paying bonuses?

WENDI S. LAZAR is of counsel to Outten & Golden LLP, a New York and Connecticut Firm. She has been practising international employment and immigration law for over 12 years with a focus on executive compensation, noncompetition and severance agreements, as well as multinational employment issues. Ms. Lazar co-heads the firm’s Executives & Professionals Contracts & Compensation Practice Group.

Fox Williams has known and worked with Wendi and Outten & Golden LLP on many international matters for clients.

The recent High Court decision in Takacs v Barclays Services Jersey Limited has reopened the debate as to whether or not you can avoid meeting contractual bonus obligations simply by terminating an employee’s employment.  Below we consider the Takacs decision, and Wendi Lazar of Outten & Golden LLP, gives us a synopsis of New York law in this area.

Takacs v Barclays Services Jersey Limited

Mr Takacs was a banker, whose remuneration package included a bonus award based on his performance.  The bonus had the usual strings attached.  It 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 being paid 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. 

The Court agreed that Mr Takacs 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 receiving his bonus. 

The case is due to go to full trial and we wait with baited breath to see how far, if at all, the Court is willing to extend the implied duties owed to employees when it comes to bonus payments.  If the Court does decide that an employer is duty-bound to co-operate when it comes to bonuses and cannot avoid paying the bonus by terminating the employee’s employment, banks and other financial institutions will have to change age-old practices.  Terms and conditions will have to be rewritten.  Moreover, there will be a sea change in the attitude of line managers who do not want to share their bonus pot with employees who, in their eyes, are “history”.

Across the Pond

In some jurisdictions in the United States, terminated employees may have a claim for unpaid but earned bonuses, even if the written contract on its face does not provide for payment. The doctrine that U.S. courts apply is the covenant of good faith and fair dealing. However, the application of this doctrine is often limited to written employment agreements with a definite term and does not apply to employment at-will arrangements.

In New York, under the covenant of good faith and fair dealing, each party to a contract is prohibited from doing “anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” See State Street Bank & Trust Co. v. Inversions Errazuris Limitada, 374 F. 3d 158, 169 (2d Cir. 2004). Applying this principle in the employment context, the court in McGrann v. First Albany Corporation (8th Circuit decision interpreting New York law) held that terminating an employee for cause, where the driving motivation was to avoid paying him a guaranteed bonus under his contract, violated the covenant. The court directed the Company to pay the employee what he would have earned if the breach had not occurred. Id, 424 F. 3d 743, 752 (8th. Cir. 2005).

Over twenty years ago, the United States Court of Appeals for the Second Circuit took a significant step in Wakefield v. Northern Telecom, Inc., when it held that an at-will employee could recover a payment under a covenant of good faith and fair dealing, if she demonstrated that the employer terminated her in order to avoid paying her earned commissions. The court said: “Where, [however], a covenant of good faith is necessary to enable one party to receive the benefits promised for performance, it is implied by the law as necessary to effectuate the intent of the parties.” See Wakefield v. Northern Telecom, Inc., 769 F.2d 109 (2d Cir. 1985). 

Notwithstanding Wakefield, New York courts have refused to adopt the same reasoning in regard to discretionary incentive compensation. In Plantier v. Cordiant, the court states that the plaintiff cannot rely on the reasoning of Wakefield even if her employer terminated her to avoid paying her annual bonus. The court said: “Ms. Plantier’s bonus was at all time discretionary and none was due when she was terminated. … In cases where no fixed amount was due at the time of termination, courts have refused to place a restriction on employer’s unfettered discretion to fire an at-will employee at any time.” See Plantier v. Cordiant Plc, 1998 U.S. Dist. LEXIS 15037.

There are other U.S. jurisdictions that have taken a more liberal view of employment at-will by recognizing claims of wrongful termination or discharge under the implied covenant of good faith and fair dealing. For example, California courts have recognized contractual claims for breach of the implied covenant in employment at-will relationships when an employer acts in bad faith to deprive the employee of a commission or other bargained for benefit that is about to vest.  See Guz v. Bechtel Nat’l. Inc., 24 Cal.4th 317, 353 (2000).  Likewise, across the U.S., arbitrators have looked beyond the employment relationship in awarding terminated plaintiffs a bonus, without relying on an express agreement.  As arbitration is quickly replacing the courts as a viable alternative to contract disputes in the U.S., perhaps the courts will pay more attention to these types of decisions in the future. However, for now, the employment at-will doctrine remains dominant in the U.S in most jurisdictions.

Conclusion

In spite of the preliminary decision in Takacs, it would seem speculative for employees to claim an entitlement to bonus where they have been dismissed before the bonus is declared or paid (particularly where the employment contract states that they must be in employment and not under notice on the payment date).  However, the way decisions are going in England, it will undoubtedly not be long before an employee successfully challenge this, and we may well see a change in the law if and when Takacs goes to full trial.  As such, employers should take real care when terminating employees shortly before a contractual sum or bonus payment is due to be paid.

In the future, it will be interesting to see if the English Courts adopt the New York law approach of requiring good faith and fair dealings from employers, particularly where a bonus has been declared but not yet paid.

Look out for a forthcoming analysis of how Takacs develops further the law set in the earlier controversial cases of Jenvey v Australian Broadcasting Corp [2002] EWHC 927 and Reda v Flag Limited [2002] IRLR 747.