UK News

The connection between clawing-back bonuses and a recent decision regarding Baby P's social workers

July 2012

It is not often that the world of bankers and clerical workers collide. Barclays Capital must have spent time deliberating whether they were legally permitted to claw-back Bob Diamond's deferred bonuses and share options around the same time that Baby P’s social workers heard from the Employment Appeal Tribunal ("EAT") that their new managers were allowed to take a different view from their old managers regarding their behaviour.

Two social workers involved in the Baby P case were dismissed by the council's new management following a second disciplinary process which was based on exactly the same facts as the first disciplinary process. The first disciplinary process had been brought by the old management and the sanction had only been a written warning. The social workers' lawyers claimed that this form of double jeopardy was not permitted but the Employment Tribunal disagreed.

The Employment Tribunal commented that there were four drivers behind the social workers' dismissals: (i) the employees' conduct; (ii) the death of Baby P; (iii) media pressure; and (iv) political pressure. Even though new facts had not emerged following the first disciplinary action, the EAT agreed with the Employment Tribunal that the social workers’ dismissals after the second disciplinary action were fair.

Whilst the facts of this case are rare and based on unusual and tragic circumstances, it is possible, in an appropriate set of facts, that the reasoning could extend to the banking world and further afield. Perhaps the new Board of a bank might consider behaviour previously regarded as acceptable to be subject to review in light of changed circumstances. Perhaps certain acts that were previously permitted are now considered to bring the employer into disrepute.

Supposing Barclays Capital considered Bob Diamond's actions to merit a disciplinary process; could the outcome have resulted in the 'claw-back' of his deferred remuneration? Legally, 'claw-back' only applies after share or bonus awards have vested. If an employer wants to reduce the value of an unvested bonus or share option they are looking at making a 'malus adjustment' in which they would advise the employee the extent to which any options yet to vest will be reduced. This is a relatively easier exercise for the employer than claw-back.

Banks need to be confident that any claw-back provision is not an invalid penalty clause as this will be one of the first arguments they will hear from the employee’s lawyer as soon as they try to claw-back vested awards. It is important that any employer seeking to 'claw-back' or impose a 'malus adjustment' carries out a full investigation and follows disciplinary proceedings before action is taken.

Although the negotiations will have taken place behind closed doors, it would be interesting to know to what extent the Barclays Capital Board decided that they could not claw-back or carry out a 'malus adjustment' on Mr Diamond's future awards. It is also certain that we have not heard the last of employment lawyers seeking to use the unusual decision in the case of Baby P’s social workers to justify retrospective review of previous internal decisions.

Resources

Christou and another v London Borough of Haringey

For further information or to discuss the issues raised, please contact Emma Clark or David Widdowson on +44 20 3051 5711.