In the recent case of Patural v DB Services (UK) Limited , the High Court considered whether a bank was in breach of contract in relation to express and implied terms including the duty to exercise its discretion rationally in awarding a trader a smaller annual bonus than other traders.
Mr Patural was employed by DB Services (UK) Limited and his terms of employment were contained in a letter of appointment, a handbook and a compliance manual. He was entitled to a discretionary bonus based on the following term in the letter of appointment:
“All employees are eligible to be considered for an annual Discretionary Incentive Award. Details are specified in the handbook… The Company reserves the right to deliver a percentage of the Incentive Awards (whether Guaranteed or Discretionary) under any applicable DB compensation plans that are in effect at the time of the award. The portion… will be determined in a manner broadly consistent with that applied to your peers at similar levels of compensation taking into account any other factors that the Company determines are relevant in any given year by the business”.
The staff handbook made clear that there was no contractual entitlement to a bonus and any award was at the discretion of the employer. It stated that it would take into account factors including the performance of the bank generally and the employee’s individual personal contribution.
The employee complained that in relation to bonus years for 2008 and 2009, he received only approximately 1% of the profits earned and discovered that two colleagues had received bonuses equating to 8 and 11% on profits made in the same period. The difference was that these two colleagues were entitled to receive guaranteed bonuses based on a set formula whereas Mr Patural was only entitled to a discretionary bonus.
Mr Patural issued a claim against DB Services (UK) Limited claiming damages for the loss of bonus in 2008 and 2009.
The employer applied for summary judgment and requested the claim to be struck out. The Court allowed the application and held that there was no real prospect of the claim succeeding at trail.
The Court found that the express terms were discretionary and the employer could take into account factors that it deemed to be relevant in the applicable bonus year. The handbook expressly stated that there was no contractual entitlement to receive a discretionary bonus.
The employee also raised arguments regarding reasonable expectations. He claimed that prior to commencing employment, he was led to believe that traders could expect a discretionary bonus of 5% in “bad” years and 10% in “good” years. The Court held that this argument was defeated by the contract that stated that it superseded any previous offers.
If you wish to provide employees with a bonus, you should take advice to ensure that steps are taken to protect the Company’s position and limit the chances of disputes arising. It is necessary to consider bonus clauses in contracts of employment and staff handbooks. One option is to consider implementing a carefully drafted contractual bonus scheme which can address the following:
- That the employee must remain in employment, and not be under suspension or under notice of termination on a payment date in order to receive the bonus;
- Payment of the bonus in the year of joining, including any arrangements for a pro rata payment or a clause that no payment will be made unless the employee has been in employment the entire bonus year;
- Mechanism for payment on termination of employment with good and bad leaver provisions;
- Whether the bonus relates to individual performance, individual performance and employer’s financial performance, the business in which the employee works or the business-wide performance; and
- How the bonus payment is to be determined e.g. specific figure, percentage of salary or subject to an overall maximum.