UK: Discretionary Benefits And The Implied Duty Of Trust And Confidence

Last Updated: 19 October 2001
Article by Karen Tickner

In the absence of express contractual provisions, an employer has discretion to confer benefits upon its employees. However, recent decisions in relation to the employer’s implied duty of mutual trust and confidence (including its obligation to act in good faith vis-à-vis its employees) have highlighted constraints on the way in which an employer is able to exercise such discretion. Two cases in particular highlight this trend. These cases and their implications are outlined below.

 

Clark v Nomura

In this case, the High Court held that an employer must not act irrationally or perversely in exercising its discretion in awarding a discretionary bonus.

Mr Clark was dismissed in 1997. Mr Clark’s contract of employment stated that he would be entitled to participate in a "discretionary bonus scheme, which is not guaranteed in any way, and is dependent upon individual performance …". In the previous financial year, Mr Clark had received a bonus of £2.55 million, having earned profits for the bank of £13.75 million. In the year in question, he had made profits of £6.4 million and, at the time the bonus was awarded, there was the probability that he would earn profits of a further £16 million for the bank, but he was given a nil bonus.

The High Court held that Nomura was in breach of contract by not awarding Mr Clark a discretionary bonus on two grounds:

(1) although Nomura’s discretion on the terms of the appointment letter was largely unfettered, the letter did say that the bonus was "dependent on individual performance". In the light of the profit earned by Mr Clark for Nomura during the relevant period, it was clear that the decision not to award him a bonus disregarded this requirement and was based on the fact that there was no need to incentivise Mr Clark for the future as he was leaving Nomura in any event. This was a breach of contract as Nomura had not taken into account the stipulated criteria;

(2) even where an employer has an absolute discretion, it must not exercise that discretion perversely. Taking into account the correct criteria, the decision not to award Mr Clark a bonus was a decision which no reasonable employer would have taken and so was perverse.

The Court went on to assess an appropriate level of bonus itself and awarded Mr Clark the sum of £1.35 million.

British Gas Plc v O’Brien

Mr O’Brien started working for British Gas in August 1995. In mid-1996 British Gas decided to offer all permanent employees who had completed three months' service an enhanced redundancy package if they signed a revised contract of employment. Mr O’Brien was not offered the revised contract of employment because British Gas did not consider that he was a permanent employee. Accordingly, when he was made redundant in August 1998, he did not receive the enhanced redundancy payment. He was the only employee to be excluded from the enhanced arrangements.

Mr O’Brien claimed breach of contract on the basis that he was a permanent employee and that British Gas’ failure to offer him the revised contract of employment was a breach of the implied duty of trust and confidence.

The Employment Appeal Tribunal (EAT) upheld the Employment Tribunal’s decision that British Gas was in breach of its implied duty of trust and confidence. The EAT found that offering the particular benefit to every employee bar one is capable of being an act calculated seriously to damage or destroy the trust and confidence between the employer and that one employee and that where such an act is done without reasonable and proper cause it is an act which no reasonable employer would take and thus is in breach of the implied term.

The EAT found that the only reason for excluding Mr O’Brien from the opportunity of entering into a revised contract was that they did not realise he was a permanent employee. This failure on the part of the employer was not a reasonable and proper cause for singling him out and thus was a breach of the implied term.

Comment

It is evident from these decisions that an employer cannot simply rely on the absence of a contractual entitlement to a particular benefit, or the fact that a particular benefit is expressly stated to be discretionary, in defending an exercise of discretion in relation to a particular benefit. The implied term of trust and confidence means that an employer must not act in a way which is deemed to be so unreasonable that no reasonable employer would act in that way. Further, an employer must act in good faith.

Therefore, an employer’s decision to grant a benefit to one employee and not another, regardless of the absence of an express contractual entitlement to such a benefit, may be challenged on the basis that the decision was perverse or made in bad faith.

This duty not to act perversely extends not only to the exercise of discretion in relation to benefits but to the exercise of managerial discretion generally(e.g. a decision to suspend an employee in the course of a disciplinary procedure.) An employer, when exercising managerial discretion, must therefore ensure that its actions are justifiable in this regard.

It is not safe to rely on the strict terms of the contract. If, for example, Mr Clark had been given notice earlier so that his employment came to an end before the bonus payment date, this would have disqualified him from a bonus on the terms of his appointment letter, but it is likely that the Court would have found that the decision to dismiss him at that stage, if taken solely to deprive him of the bonus, was in bad faith so that he would have been awarded a bonus in any event.

This briefing note is intended to raise your awareness of certain issues (as at October 2001) under the laws of England and Wales, and is not intended to be comprehensive or a substitute for proper advice which should always be taken for particular queries.

 

© Gouldens October 2001

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