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Home / Latest News / Bethan Darwin on the legal status of bonuses in the City of London

Bethan Darwin on the legal status of bonuses in the City of London

I regularly advise senior employees working in financial institutions in London.

These employees make most money via their bonuses which can be three or four times basic salary.  read court decisions on bonuses as closely as I used to read Jackie magazine in form two.

Earlier this month the Court of Appeal decided the case of Dresdner Kleinwort  and Commerzbank AG v Attrill.

The case dates back to August 2008. The shaky foundations of banking institutions were being revealed.  Northern Rock had been nationalised in February 2008 and Lehman Brothers were about to file for liquidation.

 Dresdner Bank’s CEO made an announcement to its investment banking arm Dresdner Kleinwort designed to retain staff and prevent the potential collapse of the bank.

A bonus pool of 400 million euros was guaranteed come what may.

In January 2009 the sale of Dresdner Bank to Commerzbank AG was completed.   Commerzbank ultimately received 18.2 billion euro from the German government’s stabilisation fund.

By February 2009 it was announced that employees’ bonuses would be reduced by 90%, relying on a material adverse change clause which had been introduced following the announcement of the bonus pool.  

As a result 104 employees sued their employer for their bonuses. The High Court found in their favour.  The employer appealed, but the Court of Appeal upheld the High Court’s decision.

The announcement of a guaranteed minimum bonus pool created a contractually binding obligation to pay discretionary bonuses from the pool, dependent only on individual performance.

The trial judge found that pressure to reduce the bonuses had resulted from the view that bonuses should not be paid when the German government had bailed-out the bank. “The contractual rights of the employees were sacrificed on the altar of public perception”.

The Dresdner Kleinwort case is unique, arising from political pressure, but the case law on bonuses comes from the financial services sector.

In Clark v Nomura International the employee’s contract contained a “discretionary bonus scheme which is not guaranteed in any way and is dependent upon individual performance”.

 The High Court held that the requirement to base the decision on individual performance was a “contractual straitjacket” preventing investment bank Nomura from relying on other factors, including legitimate business needs. The employer had to exercise its discretion in a manner that was not “irrational or perverse”.

In deciding on a discretionary bonus, the employer owes a duty to make its decision in a manner that is “rational and bona fide, as opposed to irrational and arbitrary” Cantor Fitzgerald International v Horkulak.  

Many bonus clauses provide that in order to receive the bonus an employee must still be in employment at the time the bonus is paid. 

 Such wording has to expressly be in the contract.  In the case of Rutherford v Seymour Pierce an employer who did not have express wording in its contract argued that a term along these lines should be implied.  The argument failed.  

A regular practice to avoid paying bonuses is timing an employee’s notice so that he is not in employment at the time the bonus is paid.

Often the employer then makes a without prejudice offer back to the employee of a little less than the bonus they would have earned, thereby using the employee’s bonus to fund an exit package. 

The case of Takacs v Barclays Services Jersey is of some assistance.

The employee argued that a term was implied into his contract of employment preventing the employer from avoiding paying him a bonus by terminating his employment.

The court said the claim was arguable but as the case was settled the position remains uncertain.  I argue it anyway. 

Bethan Dawin is a partner with Cardiff law firm Darwin Gray.

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