UK: Discretionary Bonuses: A Word of Caution

Last Updated: 31 January 2005
Article by Christopher Booth

Originally published January 2005

Bonuses are an important part of the remuneration of many employees, particularly in the financial services sector. However, even if the bonus is ‘discretionary’, an employer needs to be cautious when exercising that discretion as the recent case of Horkulak v Cantor Fitzgerald show.

Mr Horkulak’s fixed term contract provided for an annual discretionary bonus, the amount of which was ultimately determined by the company. He resigned two years before the end of the term because of his employer’s conduct and succeeded in his claim for breach of contract. However there was a dispute over the level of damages due to him. Should those damages include compensation for the loss of the discretionary bonus, which he would have expected to be paid if he had stayed in employment until the end of the fixed term?

Previous case law had suggested that the correct approach was to assume that, where there was no contractual obligation to pay a bonus, the employer would have chosen to exercise its discretion in the way that most suited it, and so award nothing. However the Court of Appeal adopted a different approach and implied a term that the parties have a reasonable expectation that the discretion will be exercised rationally, rather than on arbitrary or capricious grounds. In doing so, it followed its earlier decision in Clark v Nomura. It went on to award the full amount of the bonus had the discretion been properly exercised, amounting to nearly £650,000.

Practical Implications

The fact that a bonus clause is expressed as discretionary does not give management the power to do what it likes, particularly where discretionary bonuses are in practice an important element of the remuneration package. An arbitrary or capricious exercise of a contractual power is likely to destroy the relationship of trust and confidence, and so breach the contract of employment; or as put in this case, the parties have a reasonable expectation of ‘a bona fide and rational exercise of discretion’. Employers cannot simply suit their own interests, even though the contract may appear to give them the right to do so.

Thwarting TUPE

When an undertaking is transferred, the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) protect the employees’ position, so that their employment automatically transfers across to the new owner. The European Court's decision in Suzen suggested that in a service industry with few assets, if the new owner simply took over a contract but none of the staff, then there was no transfer. This appeared to open a way round TUPE’s protection: if a new owner refused to take staff on in order to defeat TUPE, he could do so. However the English courts have since attempted to block this loophole, on the basis that the transfer of staff is just one factor (amongst many) to be taken into account in determining whether there has been a TUPE transfer. According to this reasoning, if the new owner refuses to take staff on to prevent TUPE applying, then TUPE could still apply and the staff could be deemed to have transferred, even if none has in fact moved over.

Astle v Cheshire County Council explores the difficult question of the employer’s motive in refusing to take staff on. The Council had transferred their architectural services and staff to a contractor in 1994, a TUPE transfer. Some years later, regarding the contractor’s performance as ‘a disaster’, the contract was awarded to a new contractor, to whom some 65 of the original staff transferred.

The new contractor fared no better, and the Council attributed its poor performance to some of the original Council staff. This time round, the Council decided to terminate the contract and to use a panel of approved consultants, instead of awarding a contract to a single contractor. It also decided not to take on any of the outgoing contractor’s staff. Was there a TUPE transfer in this situation?

The Employment Tribunal decided there was not. Whilst the Council wanted to be rid of the underperforming staff, and so to thwart TUPE, there were also sound commercial reasons for operating a panel of consultants rather than a single contract.

Crucially, this meant that defeating TUPE was not the Council's principal motive in opting for the panel - although clearly it had been a factor in the decision. As a result, TUPE did not apply.

Practical Implications

If staff employed on a particular service are not performing adequately, then a change of contractor may seem an attractive option for obtaining better service. Astle shows that to avoid TUPE, not only the contractor but also the method of delivering the service must be changed; and even then the desired outcome is not always predictable or obtainable. On appeal, the Tribunal's decision was upheld, but the EAT recognised that the case might have properly been decided the other way. There is no easy way of avoiding TUPE protection for staff and legal advice should always be taken.

Do You Need to Know …?

The Morning After the Night Before...

Christmas parties have had a bad press, but a recent case gives comfort that not every rash promise made under the mistletoe is enforceable.

An employee was promised pay parity with a colleague by his manager at the Christmas party. Two years later, when it had still not been achieved, he resigned and claimed constructive unfair dismissal. The promise was not disputed, but the EAT held that it could not be enforced, since one of the fundamental ingredients of any contractual obligation was lacking, namely the intention to create legal relations. Given the context, the manager’s words were just the expression of a hope or a wish and did not amount to a binding obligation.

Retirement Ages - a decision at long last

After consulting on the issue for the past year, the Government (contrary to some predictions) has announced that there will be a default retirement age of 65 for UK workers. Business leaders - who had feared that the UK would have to abolish mandatory retirement ages to implement European age discrimination laws - have expressed their relief. Under the new proposals employers will only be able to set a retirement age below 65 if this is both ‘appropriate and necessary’. In addition, employees will have the right to request to work beyond the default retirement age in much the same way as parents of young children can now request flexible working. Draft regulations are expected in the summer.

New Tribunal Compensation Limits

The annual revision of the limits on Tribunal compensation to account for inflation comes into force on 1 February 2005. The maximum week’s pay used for calculating redundancy payments and the basic award for unfair dismissal increases from £270 to £280; and the maximum compensatory award for unfair dismissal goes up to £56,800. The daily Guarantee Pay rate for lay offs increases to £18.40. The increases apply where the dismissal (or other relevant event) occurs on or after 1 February.

Cases referred to in this update:

Horkulak v Cantor Fitzgerald International [2004] IRLR 942; Astle v Cheshire County Council EAT 0970/03; Suzen v Zehnacker [1977] ICR 662; Eastwood v Magnox Electric [2004] IRLR 733; Judge v Crown Leisure Ltd EAT 0443/04.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.