Defending bonus claims – How can you minimise your exposure to this risk?

t’s the first phase of bonus season, and the news as to ‘who’s getting what’, across the city and farther afield, is being rolled out. In a few months phase two of bonus season will start; the lawyers will be drafted in and you may be on the receiving end of pre-action letters and High Court claim forms from aggrieved current and former employees.

Broadly speaking, these claims arise in two ways:

1.   Employees who bring claims against the company for breach of contract (either for failing to pay them the sum that is due by reference to the contractually agreed targets and formulas or, where the bonus is discretionary, for exercising the discretion in a perverse or irrational manner). These employees often resign and claim that they have been constructively dismissed; or

2.   By exploiting some developing case-law, which is still uncertain, recently dismissed employees might bring a claim against the company asserting that they were only dismissed so that the company could avoid having to pay them a bonus at all.

In truth even if your company is the most fair, reasonable and law-abiding citizen these claims are very likely to made against you at some point, because there are always employees who are prepared to fight an unmeritorious case (either because they have a distorted perception of their value or the facts, or they hope commercial considerations will pressure the company into a settlement). So, what can you do to minimise the risk of a claim being brought at all or to minimise the financial costs of claims that you are forced to defend?

The following is a useful check-list to follow:

• Make sure that you have filed in a secure place copies of the employment contracts for all of your employees. It is important that these contracts have been signed and that any variations to these contracts are in writing, agreed by the employee and filed with the original contract. Where you have employees on secondment, make sure that the secondment documentation is similarly finalised and filed. Be aware of any inconsistencies between the secondment contract and the original employment contract which may impact on bonuses. Make sure that the relevant line managers are aware of these issues in reaching bonus decisions.
• Check that all employment contracts accurately and clearly explain whether the employee is eligible for a bonus and if so either how it will be calculated or a clear statement that it is within the company’s sole discretion. You should also cover when it will be paid and whether there are any other conditions that must be satisfied (such as the employee being in employment and not on notice at the time the bonus is due to be paid). Employees who have been with the company for some time may have an out-dated bonus provision in their employment contract and careful consideration needs to be given as to whether the employment contract needs to be amended. The same issues arise when employees are transferred on a sale of the business (or a merger). It is risky to rely on the bonus provisions in a staff handbook (or other policy documentation) – amending the contract itself gives much more legal certainty.
• If there are conditions that need to be satisfied before bonuses are paid, make sure that your internal procedures are sufficient to ensure that you can clearly demonstrate that the conditions are complied with before payment is made (and that line managers do not informally say or do anything that would compromise the situation).
• Keep proper records of bonus decisions and the rationale for each decision filed in an orderly way. If a bonus decision is likely to be viewed as contentious, for whatever reason, document the thinking behind the decision in as much detail as possible. Contemporaneous documents will be much more persuasive evidence than any retrospective explanation. Remember that the limitation period for breach of contract claims is six years, so personnel and business structures may  have changed (and at the very least memories will have faded) by the time a claim is started.
• Bear in mind that it will usually be easier to defend a low bonus award than a zero bonus award. While some fetters on a employer’s decision making do exist, a properly drafted discretionary bonus award does still give the employer a degree of flexibility and it is only perverse or irrational decisions which can be attacked.
• Note that a decision to reduce an employee’s bonus award on the grounds of their conduct or performance can constitute disciplinary action for the purposes of the Statutory Disciplinary Procedures. This is a particular risk where either a bonus has been provisionally awarded and is then reduced or when the reduction is otherwise obvious. In these cases, you should be sure that the statutory procedures have been complied with before the reduction is made.
• Be aware of the risks in terminating an employee’s employment simply to avoid paying them a bonus. Although the case law as to whether they could still claim for future bonuses is not settled, there is a risk that a claim going through the court will change the law in this area and that you may still have to pay the bonus. Having said that, if you want to avoid bonus payment and the contract states that an employee must be employed and not under notice to receive a bonus then, based on the law as it currently stands, you will have a better chance of avoiding the bonus payment by dismissing than if the employee is still employed.  The motivations for any dismissals around bonus time could come under close scrutiny, so if you have to dismiss at that time – double check that you have complied with the necessary procedures and that you can show a reason for dismissal other than depriving the employee of bonus.
• Take bonus complaints seriously. If you receive a written complaint about a bonus award then this is likely to constitute a grievance under the Statutory Grievance Procedures. Depending on the circumstances, some claims for bonus can be brought in the Employment Tribunal either as a claim for unlawful deduction from wages, for breach of contract or as part of a (constructive) unfair dismissal claim, in this case, if you have failed to complete an applicable grievance procedure any award could be uplifted by between 10% and 50%.
• If despite all of your good procedures you become embroiled in a bonus claim, conduct an objective,  realistic assessment of the merits as soon as possible.  If you conclude that a court will side with the employee, be realistic about the likely quantum and be prepared to settle for a sensible sum early on, so as to save you time and money.