UK: Bonus: The Exercise Of Employer’s Discretion

Last Updated: 3 March 2005
Article by Robert Hill and Matthew Howse

The decision of the Court of Appeal in Horkulak v Cantor Fitzgerald highlights clearly the importance of carefully drafting bonus clauses and that an employer’s discretion may not be as wide as they would hope.

HIGH COURT DECISION

Mr Horkulak, a former senior managing director at Cantor Fitzgerald, brought a case for constructive dismissal against his former employer based on allegations of bullying and harassment by the company’s President, Lee Amaitis. Mr Horkulak was successful in showing that he was constructively dismissed and was originally awarded damages of almost £1 million in the High Court (the decision on quantum has since been referred back to the High Court for re-determination due to the inadequacy of the reasons given for the size of the award).

Mr Horkulak had the benefit of a fixed term in his contract of employment that had almost 2 years to run from the date of his constructive dismissal. At the date of his dismissal he received a salary of £250,000 a year, a guaranteed bonus and a discretionary bonus, which stated that "the Company may in its discretion, pay you an annual discretionary bonus... It is condition precedent to any payment... that you shall still be working for and not have given notice to or attempted to procure your release from this agreement nor have given notice to the Company on the date that such bonus is due to be paid".

The Court held that Cantor Fitzgerald was obliged to exercise its discretion "reasonably and in good faith" and made an award of contractual damages representing what a fair and rational employer would have paid in respect of a discretionary bonus award. The Court relied on the principles set out most clearly in Clark v Nomura and Clark v Bet plc to the effect that for the exercise of discretion to be unlawful, it must be that no reasonable employer would have exercised its discretion in that way.

THE COURT OF APPEAL DECISION

Cantor Fitzgerald argued that the judge had erred (1) in treating the existence of the bonus clause, which was discretionary, as entitling him to any award of damages and/or (2) in awarding damages on the basis of a finding of what Mr Horkulak was likely to have received had he stayed with Cantor Fitzgerald.

The Court of Appeal held that the judge had been correct in his approach to the first issue and stated that Mr Horkulak was entitled to "a bona fide and rational exercise by Cantor Fitzgerald of their discretion as to whether or not to pay him a bonus and in what sum". They referred to the fact that the relevant clause was in a contract of employment, payment of discretionary bonuses were part of the remuneration structure, and that a condition precedent applied to the payment of the bonus that Mr Horkulak should still be working for Cantor Fitzgerald and not be serving notice by the time payment is made. The latter fact was said to demonstrate that the bonus was to be paid in anticipation of future loyalty and therefore should necessarily be read as being intended to have some contractual intent.

As to the second issue, the Court of Appeal rejected the argument that the judge should consider the decision from the employer’s perspective and in doing so "should have looked at the bottom (least burdensome) of the range of decisions which might have been read as in a bona fide and rational application of the criteria" and awarded this sum.

CONCLUSION

In determining whether such a bonus should be paid at all, the first step is to decide whether an employee is entitled to an exercise of discretion on the construction of the bonus clause. If that is the case, that discretion must be exercised rationally and in good faith. In deciding the sum of compensation, the judge must not substitute his own view of what would be a reasonable payment to make but must put himself in the shoes of the decision maker acting rationally and not arbitrarily or perversely. The court will not decide on a range of reasonable payments which could have been made and only impose the minimised obligation.

This case emphasises the difficulties for employers who wish to have truly discretionary bonus schemes. In practice it may be better to accept that many such schemes will be treated by the courts as being contractual in nature and focus the drafting on the criteria to be applied to allow as much freedom as possible in the exercise of the scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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