Discretionary bonuses for bankers could still be payable

There has been much outcry over whether or not bank employees will receive their bonuses this year, especially those at bailed-out Royal Bank of Scotland and Lloyds TSB. The government claims it is intending to halt almost all “discretionary bonuses” but must still pay bonuses to those who have a cast-iron contractual claim to them. The news coverage seems to have thus polarised between discretionary bonus and contractual bonus.

The legal situation is much more complicated. A discretionary bonus is not subject to absolute and unfettered discretion. A line of cases ended at the Court of Appeal in Cantor Fitzgerald International v Horkulak [2004] EWCA Civ 1287, (recently applied in Small & Ors v The Boots Co Plc & Anor [2009] UKEAT, interestingly in relation to obligations on TUPE transferees), where it was held that:

“it is presumed to be the reasonable expectation and therefore the common intention of the parties that there should be a genuine and rational, as opposed to an empty or irrational, exercise of discretion.”

Potter LJ seemed to place particular emphasis on the bonus in that case being part of the overall remunerative structure – just like many of the bank employees.

Clearly in many cases the bank will be able to lawfully assess a discretionary bonus at nil pounds, especially where the employee concerned played some part in the downfall of the bank. But what about an employee who worked very hard and very successfully, in an area of the bank that wasn’t tainted by the surrounding collapse? Perhaps the wording or context of the discretionary bonus might even refer to individual performance. This class of employee is far from inconceivable, and might well have a good claim to receive a bonus as usual this year.

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