Guest Comment: The tide has turned for bonus cases

Fraser Younson, partner and head of employment at law firm Berwin Leighton Paisner LLP, on why James Keen's failure to win the case against Commerzbank is bad news for bankers.

Over recent years banks have come under pressure from employees over discretionary bonuses. Although bonuses are non-contractual and employers have no obligation to pay them, banks are still bound not to undermine the trust and confidence implied in the employment contract.

Since 2000, when Nomura International was sued 1.35m for not paying a discretionary bonus to trader Steven Clark, the test for whether that confidence has been undermined has been that employers have an obligation not to act perversely or irrationally when deciding the level of bonus. Last year, in a case involving Cantor Fitzgerald, the courts commented to the effect that in order to avoid the charge of acting irrationally or perversely, employers must be able to justify the level of bonus they pay. The onus to justify bonus payouts was effectively placed on banks.

Last week's judgement on the case involving Commerzbank AG seems to have turned the tide. Although the claimant, James Keen, received bonuses of approximately €3m in both 2003 and 2004, he felt this did not reflect his team's success. Mr. Keen argued that it was irrational for his employer to have limited his team's bonus pool when its profitability had been excellent. The bank had decided to limit their bonus pool to 10% rather than the 17.5% that his manager had recommended.

The Court of Appeal said that, unless there was evidence of perversity or irrationality on the face of the bonus decision, the employer was not obliged to justify that its bonus allocation was not irrational or perverse. In this case, the Court concluded that there was no such evidence.

Mr. Keen failed primarily because the bank's bonus scheme contained a very wide contractual discretion. He had the burden of showing that "no rational bank in the city would have paid him a bonus of less than his line manager had recommended and such a test is a very high one." The Court said "it would require an overwhelming case to persuade the court to find that the level of discretionary bonus payment was irrational or perverse in an area where so much must depend on the discretionary judgment of the bank in the fluctuating market and labour conditions."

Mr. Keen failed to establish a sufficient case because there was no evidence about his manager's recommendation. He also failed to produce independent evidence to support his claim of the bank's alleged irrationality.

Mr. Keen also claimed for his 2005 bonus which he did not receive at all. This was because the bank's bonus scheme had the normal clause to the effect that unless employees are still in employment and not under notice at the payment date they are not entitled to any bonus. Keen argued that this rule was void under the Unfair Contract Terms Act 1977, but the court rejected his argument. Bonus schemes which have this rule can therefore still operate to prevent employees receiving a bonus for part years worked - unless their employer has deliberately decided to time dismissals to avoid paying a bonus.

This last part of the judgement should act to deter banks from dismissing staff just prior to bonus payouts. It will make it difficult, however, for those dismissed at other times to build a case for an award pro rata.