High Court holds employers may be bound to pay bonuses communicated to employees
The High Court has held that where an employer announces that a particular sum has been set aside for bonuses, that could amount to a contractual entitlement to the bonus.
Dresdner Kleinwort Limited ("Dresdner") informed a number of its employees that they would be eligible for a share of a guaranteed minimum bonus pool, dependant upon a review of their individual performance, to be allocated "in the usual way". Individual contracts provided that bonuses would be discretionary.
The claimants were later sent letters which set out their provisional bonuses and informed them that this bonus was subject to review and would be reduced if there were material deviations as against the revenue and earnings forecast. Following the sale of Dresdner to Commerzbank, the board identified additional material deviations and advised the claimants that the bonus pool had been reduced by 90%.
The claimants brought a claim in the High Court for breach of contract. The High Court held that the announcement of the guaranteed minimum bonus pool gave rise to a contractual obligation, owed to the claimants by Dresdner, to then distribute that pool. The High Court further held that the failure to pay the claimants the amount as payable to each individual, set out in the letter each had received, entitled the claimants to an award of damages, of the difference between the amount specified in the letter and what was eventually paid.
The High Court went on to consider the clause relating to material deviations. It found that attaching later conditions to the pay out of the bonus pool was a breach of contract on the part of Dresdner. It went on to say that, even though an individual’s award from the pool was discretionary, it would be implied into the contract that that discretion would be exercised in good faith and in a rational way.
Although the case to some extent turns on its own facts, it demonstrates the importance of taking great care in the language used in relation to payments under bonus schemes. Whilst employers will not want to lose the motivational aspects of incentive based remuneration, equally most will not want to create a system where bonuses are payable as of right. To retain real discretion this case shows that any statements made to staff relating to bonuses contain clear language as to any limitations or conditions and do not give rise to expectations in advance of individual award.