Executive Employment Services: Bonus Disputes
8 August 2022
An Executive’s remuneration package will often include significant performance-based bonuses. These bonuses will generally fall into two categories; contractual bonuses and discretionary (non-contractual) bonuses. Just to confuse matters further, a bonus scheme may also contain contractual and discretionary elements within the same scheme.
Contractual bonus schemes will have their terms set out either in the employment contract or in another document which also has a contractual effect. It will be difficult for an employer to avoid payment subject to the terms of the scheme. A failure of the employer to pay a contractual bonus will result in a breach of contract which can be pursued in the Tribunal or Courts.
By contrast, a discretionary or non-contractual bonus scheme can give rise to significant disputes as to whether a bonus is paid or the value of that bonus. Most Executive bonus schemes are expressed to be discretionary. When a dispute on an executive bonus occurs it will be important to identify precisely which part of the bonus scheme the employer has discretion over for example:-
- Whether a bonus should be offered at all;
- Eligibility for a bonus;
- The amount or any cap on a bonus;
- How the bonus should be calculated.
It is established law that when an employer exercises its discretion in relation to a bonus that it should not act in a manner that is irrational. The employer must exercise its discretion in good faith. A common example of this will be where an employer decides not to pay a bonus to an employee who is leaving. If the executive would otherwise have been paid a bonus having attained the various performance requirements then it would be expected that the employers discretion would be exercised in this way. If challenged by the executive, then the employer would need to be prepared to explain its decision making process. However, this would be subject to there being no other contractual provisions to the contrary.
A common clause in Service Agreement bonus clauses or bonus schemes is that the executive will not be entitled to a bonus if they have ceased to be employed or are under notice of termination at the date the bonus is paid. Whilst the savvy executive, who is planning on leaving a company will ensure that they delay their resignation until after an annual bonus has been paid, what happens if the employer decides to dismiss? The employer will often be able to rely upon a termination exclusion like the one above, but may also be able to rely on the terms of a Payment In Lieu of Notice (PILON) clause that may exclude bonus entitlement. In such circumstances, an executive’s options to recoup their bonus appears limited, but if the dismissal is found to be unfair or discriminatory or because of whistleblowing then it is possible to pursue bonus payments via these statutory claims.
Finally, female executives frequently experience issues surrounding bonuses. This could be that their bonuses are lower than their male counterparts and may form the basis of an Equal Pay claim. Alternatively, there may be issues surrounding the payment of bonuses whilst on maternity leave. Employees who are on maternity leave will normally be entitled to receive a bonus (be it contractual or discretionary) but this may be on a pro-rata basis taking into account periods of time actually worked in the bonus year.
If a bonus payment has not been paid or has been paid at a lower amount than was expected then it is best to discuss this with the employer first and seek an explanation. If the issue remains unresolved it may be appropriate to seek legal advice from a Solicitor experienced in dealing with executive bonus disputes. If a bonus remains outstanding then, depending on the circumstances and value of the bonus, proceedings could be issued in the Employment Tribunal for an unlawful deduction from wages or a breach of contract (although note that breach of contract claims are limited to £25,000 in the Tribunal). Alternatively, a claim could be issued in the Civil Courts. If the non-payment of a bonus is linked to a dismissal, discriminatory treatment or whistleblowing then recovery can potentially be made through the respective statutory claim (although note that there is a limit on compensation for unfair dismissal claims).
MKB Law’s employment team have dealt with many complex and high-value executive bonus claims which have included bonus settlements in excess of £1m. If you need experienced legal advice, we can help, please get in touch.