With the recent assistance that Lloyds Banking Group has received from the Government there has been a clear statement that only the most junior staff will receive bonuses this year.  These statements all seem very sensible in the current climate but how easily do they fit in with employee’s contracts and entitlements? 

Approximately 250 bankers at London’s Dresdner Kleinwort are currently suing the bank for millions of pounds in unpaid bonuses following a takeover by Commerzbank.  The bankers had received written notification of their bonuses late last year and the bank is now trying to vary these bonuses due to economic circumstances and massive losses. 

The Legals

Contractual bonus schemes
Contractual bonus schemes are generally speaking more straightforward, however the risk to companies is much higher if it denies the employee their contractual entitlement.  Potential claims for failure to pay a contractual bonus include:

• Breach of contract

• Constructive unfair dismissal

• Wrongful dismissal

• Discrimination (depending on the circumstances).

Discretionary bonus schemes
Bonus clauses are often drafted on a discretionary basis with the key goal being to put the employer under no obligation to implement a scheme or to award bonuses.  The schemes often stipulate certain requirements from the individual or the company as a whole which must be met before the employer will exercise its discretion.  Very careful drafting is required to try and ensure the scheme remains discretionary, however, in reality these schemes often through custom and practice take on some contractual elements.  Employers are still at risk from claims if they fail to follow the rules of the scheme or if they act in a discriminatory manner with regard to the scheme.  In addition, where the scheme has taken on a contractual nature, the employer is open to the claims listed above. 

Case law has found that there is an implied term in employee’s contracts which states that discretion should not be exercised irrationally or perversely and should be exercised objectively, rationally and in good faith.