Bonuses in the Covid-19 era: pushing the boundaries

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Changes to bonuses, as businesses are impacted by the pandemic and Brexit crises, could well lead to tensions and legal cases, writes Ivor Adair

Bonuses can be an effective business tool to incentivise, acknowledge and reward good performance. A bonus can also correct overall remuneration in the context of a shifting market benchmark. For many senior executives, bonuses are a significant part of their remuneration. This is particularly so in financial services and in relatively new or high growth businesses, where the business prizes flexibility in its payment of remuneration.

The financial consequences of the pandemic and spectre of significant redundancies means major adjustments to bonuses are inevitable in many sectors. Practitioners are also seeing redundancies or other dismissals towards the end of the financial year with the effect, intentional or otherwise, of defeating payment of bonus. Where jobs are scarce, this practice is far more likely to be challenged. The current climate is likely to reanimate many of the tensions seen after the credit crunch.

Discretionary powers – within the outer limits

Very often the employment contract or bonus scheme does not define entitlement to bonus in a mechanistic way; instead provides that bonus is discretionary. However, depending on the wording of the bonus provision, that does not mean the employer can avoid making a decision about what bonus to award. Moreover, there are legal limits on discretion. These include an implied obligation to exercise discretion in good faith, not irrationally or capriciously and not in breach of the implied term of trust and confidence.

Many employers do not appreciate where the dangers lie and what they can do to reduce the risk of challenges”

Following a Supreme Court decision reported in 2015, Braganza v BP Shipping Ltd, which considered the limits on an employer forming its own opinion, an executive may also have arguments about the way a bonus decision was reached. The Braganza duty focuses on the decision-making process and its outcome. A breach will occur where (a) the decision-maker has taken into account irrelevant factors, or disregarded relevant factors, or (b) made a decision so unreasonable that no reasonable decision-maker could ever have come to it.

Whereas the scope for scrutiny of any particular bonus decision is uncertain, the modern emphasis on process, ie what did you have regard to and not have regard to, could transform a bonus dispute. This is particularly relevant in the Covid-19 era where there may be pressure to cut corners. Executives may argue that consultation is required so they may understand what has been taken into account and what disregarded, or that management ought to provide reasons for the bonus decision so they (and potentially a court) can be satisfied that the right things were taken into account.

Many employers do not appreciate where the dangers lie and what they can do to reduce the risk of challenges. If a rationale for a bonus payment is documented, employers ought to proceed on the assumption it will eventually be scrutinised and ensure a defensible rationale is recorded which makes clear the right considerations have been taken into account. If there is no contemporaneous evidence of the decision-making process at all, a judge might be less persuaded the decision was a rational one.

Businesses also ought to be alive to the risk that an executive argues they have been dismissed simply to defeat payment of a valuable bonus”

Dismissal to obstruct payment of bonus

Businesses also ought to be alive to the risk that an executive argues they have been dismissed simply to defeat payment of a valuable bonus. In some cases it may be arguable that an executive benefits from an implied term requiring the employer to cooperate to enable the executive to earn a bonus, or one that prevents the employer from avoiding its obligation to pay bonus by terminating their employment. The 2006 case of Takacs v Barclays Services Jersey Ltd offers a basis to develop these arguments.

In unprecedented times and a recession where conservation of cash is a priority, inevitably there will be decisions resulting in the avoidance of substantial bonus payments, payments employees are reasonably expected to receive after a tough year. Those same decisions might well have expensive legal implications. Employers also ought to be mindful of the serious cultural implications and demotivating message this sends to the remaining workforce. It is likely that Takacs-type arguments will be raised more frequently in the volume of bonus cases that are expected as part of the fallout arising from the pandemic.

Don’t forget statutory claims

Reduction or non-payment of bonus can also be challenged on the basis it was for a discriminatory reason, or on the basis that it is a reprisal for whistleblowing. In both scenarios uncapped damages may be awarded. Bonus may also be claimed in an unfair dismissal claim.

It is increasingly common for employers to receive a subject access request pursuant to the employee’s data rights under the GDPR to gather information that may be relevant to a legal challenge. Businesses ought to be prepared to address complaints under the data legislation.

Given the potential upside of a successful bonus claim and availability of arguments in developing areas of law, businesses ought to brace themselves for challenge where a bad or no bonus is contemplated.

The content of this article is not legal advice and is not intended to provide more than general commentary on the subject matter. Specialist employment law advice should always be sought about your specific circumstances.