UK: Court Not Keen On Bonus Bonanza

Last Updated: 8 December 2006
Article by James Libson and Joanna Blackburn

Employers can breathe a sigh of relief following the recent case of James Keen v Commerzbank AG, in which the Court of Appeal has handed down a judgment dealing with the high profile issue of discretionary bonus payments.

Mr Keen worked for Commerzbank as manager of the proprietary trading desk from November 2002 until he was made redundant in June 2005, when the desk closed. In addition to his basic annual salary of £120,000 and a benefits package, Mr Keen was also eligible to participate in the Bank's discretionary bonus scheme.

The terms of the bonus scheme, which were set out in an offer letter, were the typical discretionary bonus terms that are found in most employment contracts. It was made clear that the decision to make an award, the amount of any such award and the timing and form of an award were at the discretion of the Bank. A list of factors to be taken into account by the Bank when determining the award were listed and, crucially, it was expressly stated that no bonus would be paid to Mr Keen if he was no longer employed or on notice at the date when the bonus was paid. The bonus year was the calendar year and the payments were made in March following the end of the bonus year.

Mr Keen was paid bonuses of €2.8 million for 2003 and €2.95 million for 2004. He was not awarded any bonus for 2005 as he was dismissed in June of that year and the Bank relied on the express term, which stipulated that he would not be entitled to a bonus if he was no longer employed at the date the bonus for any year was paid.

Mr Keen claimed that he was owed millions on top of the almost €6 million he was paid for two years’ work, and millions more in bonuses for his last half year of employment for the Bank.

The Bank applied for summary judgment in relation to the two bonus claims on the basis that they had no reasonable prospect of success. In the first instance, the Commercial Court held that Mr Keen had a properly arguable claim and dismissed the Bank’s application. Although the initial ruling was only in relation to a summary judgment application, it alarmed employers. If the decision was subsequently upheld at trial, it would have significantly reduced the ability of employers to have free rein over bonus awards for their staff, and could have led to discretionary bonuses being replaced by specific target based bonuses.

However, the Court of Appeal has now reversed the decision and dismissed Mr Keen’s bonus claims.

With regard to the 2003 and 2004 bonuses, Mr Keen said he should have been paid more than the €5.75 million he was paid. He argued that the Bank had breached the implied term in his employment contract that it would not exercise its discretion irrationally or perversely. The crux of Mr Keen’s argument was that the Bank had not followed the recommendations of his line manager or taken into account the exceptional performance of his team when deciding his bonus payment. The Court of Appeal held that the Bank had a very wide contractual discretion and it could not be said that its decisions on Mr Keen’s bonuses for 2003 and 2004 were irrational. It was further indicated by the Court that it would require an overwhelming case to persuade it to find that the level of a discretionary bonus payment was irrational in an area where so much depended on the discretionary judgment of the Bank in fluctuating market and labour conditions.

With regard to the non-payment of the 2005 bonus, Mr Keen contended that, although his employment was terminated in June 2005, the Bank was in breach of contract in not awarding him any bonus for his work in 2005 before his employment came to an end. During this time, Mr Keen’s desk made a profit of €46.5 million. In addition to arguing that the Bank had exercised its discretion irrationally (the identical argument used in respect of the underpaid 2003 and 2004 bonuses), Mr Keen argued that the provision preventing him from being entitled to a bonus because he was no longer employed at the payment date was caught by section 3 of the Unfair Contract Terms Act ("UCTA") and was an unfair term.

The Court of Appeal held that Mr Keen did not satisfy the relevant tests for UCTA to apply to his employment contract and confirmed that, following earlier cases, the "regulation of fairness of contract terms by section 3 of UCTA is not primarily directed at personal work or employment contracts and is not particularly appropriate to them."

This case is of crucial importance to employers and reiterates the ability to refuse payment of discretionary bonuses on the basis of express terms which require continued employment at the relevant bonus payment dates. Given the size of Mr Keen’s 2003 and 2004 bonuses, it is not surprising that the Court did not find the Bank’s decision to be irrational. However, employers should continue to be mindful of exercising their discretion fairly and ensure that bonus awards can be fully justified.

A cautionary contract case

The majority of staff handbooks are split into contractual and non-contractual sections so that an employer has flexibility in following procedures and policies which form part of the non-contractual sections. Employers who do not comply with contractual matters risk claims from their employees for breach of contract.

The recent Court of Appeal case of Keeley v Fosroc International Limited provided some useful guidance as to the way Courts are likely to interpret clauses within staff handbooks.

The case concerned an enhanced redundancy payment scheme set out in a staff handbook in a non-contractual section entitled "Employee Benefits and Rights". Although the procedure was contained in the non-contractual section of the handbook, the Court held that as a matter of construction, the procedure was capable of being a contractual term. It also held that redundancy provisions are by their very nature "apt" for incorporation into a contract of employment. Accordingly, and despite the employer putting the procedure in the non-contractual section of the handbook, it was held to be contractual nonetheless.

Keeley contained certain specific facts which are likely to have persuaded the Court to reach its decision in this case. In particular, a key issue was the fact that the staff handbook provided that the enhanced redundancy payment was a payment to which employees were "entitled". Nevertheless, this case is a cautionary warning to employers not to include details of discretionary schemes in employee handbooks or contracts.

Carers to benefit from flexible working arrangements.

As part of the Work and Families Act 2006, a new right will come into force on 6 April 2007 for "carers" of adults to request flexible working arrangements.

The definition of "carer" has recently been confirmed by the Government and will cover employees who are expecting to be caring for an adult who:

  1. is married to, or the partner or civil partner of the employee; or
  2. is a near relative of the employee; or
  3. falls into neither category but lives at the same address as the employee.

The right of carers to flexible working will mirror the right already enjoyed by parents and will therefore not be an automatic entitlement. An employer will have a duty to consider any request, deal with the request in accordance with the statutory procedure and should only refuse the request by reference to specified business grounds.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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