New bonus case gives employers sleepless nights

Thousand of employers that operate discretionary bonus schemes for their staff may be having a few sleepless nights as we enter the New Year following a recent Court of Appeal decision, says Russell Brown, Employment Solicitor at Manchester law firm, Glaisyers.

The case involved a broker, Mr Horkulak (employed by Cantor Fitzgerald International) seeking compensation for a withheld discretionary bonus payment.

Mr Horkulak successfully claimed that he had been both constructively and wrongfully dismissed following continued bullying and abusive behaviour from the President of Cantor Fitzgerald International.

Mr Horkulak went on to successfully argue that had he remained employed by Cantor Fitzgerald International, he would have received bonuses amounting to 630,000 under a discretionary bonus clause contained within his contract of employment.

The Court agreed that even where employers have a discretion regarding bonus payments there are restrictions placed upon employers when exercising their discretion, namely that they must do so rationally and in good faith.

Brown said ìMany employers operate discretionary bonus schemes and use them as a deliberate attempt to avoid being placed under specific contractual obligations. Following this case however it is essential employers are extremely careful when both establishing whether a bonus payment is payable and if so, how the bonus payment is calculated. If they are not, then the law is now very clear on how the employee in question should be compensated.

ìWhen paying a discretionary bonus, employers now need to review the bonus clause and decide whether it entitles an employee to an exercise of discretion applying the wording of the bonus clause. If that is the case, and judging by the Court of Appealís decision it would appear that the answer to this will be ìyesî in a large number of cases, then the discretion must be exercised rationally and in good faith. If it is not exercised rationally or in good faith the Court must put itself in the shoes of the employer and consider what decision, not acting arbitrarily or perversely would have been reached.

ìWhat is now clear is that those employers who operate a bonus scheme which is not transparent as to how it is calculated face the prospect of potential claims. Employers should therefore take great care when exercising discretion when calculating bonus payments and be in a position to articulate their assessments in rational terms in order to demonstrate that they were made in good faith. Furthermore, employers should think carefully about recording reasons in order to demonstrate that they have exercised their discretion in a rational and non-capricious manner.î