Bonus compensation highlights contract importance
Wednesday, 9th June 2010
Following a recent High Court case, employers must draft precise contracts or bonus schemes indicating whether an employee is entitled to unpaid bonuses accrued during the relevant working period.
Malcolm Rutherford, who was released by investment banking firm Seymour Pierce during the last quarter of the financial year, brought a High Court claim against his employers arguing that he was owed a final bonus payment collected in the months before his dismissal.
Seymour Pierce’s bonus scheme placed 40% of the commission earned by employees into a bonus pool. Half of the funds were then paid out at the end of the third quarter, with the remaining balance offered after the fourth quarter.
However, the bonus scheme did not have an express term stating whether an employee had to still be in employment on the day of payment to receive their bonus.
Seymour Pierce claimed that, as is implied in Mr Rutherford’s contract of employment, “'in order to be entitled to be considered for an award under the bonus scheme, an eligible participant has to be employed by and/or under notice of termination of their employment as at the date of payment of any award”.
But the High Court ruled that the implied term was “manifestly unreasonable”, theoretically allowing Seymour Pierce to release employees just days before bonus payments were issued.
According to the judge, Mr Rutherford had performed well during his time at the company, contrary to Seymour Pierce’s allegations, awarding him £70,000, which was between the upper and lower limits of the bonus entitlement identified by the Court.
To avoid costly payouts, employers have been encouraged to establish clear guidelines in contracts, either employment or bonus related, detailing the course of action when an employee is released before bonus payments are due.
As Mr Rutherford’s case proves, companies failing to properly explain their bonus procedures could find themselves in front of the nation’s judges, where unnecessary legal fees could further damage a company’s reputation and finances.
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