Keen v Commerzbank and Employees Challenge - Case Study Example

Case Keen v Commerzbank AG [2006] EWCA Civ 1536 It was on the basis of Section 3 of the 1977 Act that the Court of Appeal in Keen v Commerzbank ruled that the employee’s challenge to the application of a discretionary bonus scheme provided for in the contract of employment could not be the subject of a challenge under the Unfair Contract Terms Act 1977 since the Act requires one party to be a consumer. This is because the employee is not a consumer pursuant to the 1977 Act.1 It was also held that the employee may still have a challenge if he is able to prove that the employer intentionally terminated the employment as a means of escaping the obligation to pay a bonus in cases where a contract of employment provided that the employee is not entitled to a bonus payment should he/she be unemployed at the time payment of the bonus is due. Such a claim would fall under the implied duty of trust and confidence.2 Under the implied duty of trust and confidence which is essentially pro-employee requires that the employer treat the employee with “due respect and consideration”, having regard to their needs and sympathetic to their difficulties and expectations.3 The ruling in Keen essentially shifts the tide in that it takes a pro-employer approach, although it attempts to perseve the general concepts of the implied duty of trust and confidence. The ruling in Keen v Commerzbank came at a time of unstable market fluctuations and entirely constrained labour conditions. In this regard, the court ruled that the employee wishing to successfully challenge the amount allotted him/her with respect to a discretionary bonus would have an onerous burden of proof to discharge. Proof that the employer paid a smaller bonus than that recommended by his/her manager and an amount that did not correspond with the employee’s labour input would not be sufficient evidence to discharge the employee’s burden of proof. The current labour and market conditions would therefore provide the employer with a wide discretion with respect to the distribution of the amount of bonus paid. The employee would need additional and corroborative evidence to support a claim that the employer’s discretion was irrational or perverse.4 In this regard, the irrational and perverse requirement would establish that there was a breach of the implied duty of trust and confidence. In acknowledging the significance of the established principle of the implied duty of trust and confidence the Court of Appeal confirmed that the employer would typically be required to provide a reason for the exercise of its bonus distribution discretion in a specific way. Even so, failure to do so would not automatically render the discretion to distribute the bonus perverse or irrational.5 This new approach appears to weaken the implied duty of trust and confidence by relieving the employer of a duty to provide a reason for the decision. The reasonable implication is that employee is required to assume that the employer acted judiciously, unless there is evidence to the contrary. The emphasis on the high standard of proof that the employer’s exercise of the discretion to distribute a bonus and the amount paid appears to be a departure from the decision in Clark v Nomura International plc. In this case the court ruled that the refusal to pay a bonus in light of the employee’s exemplary performance was perverse and irrational.6 In this case the discretion to pay out a bonus had been exercised by reference to factors such as the employee’s refusal to take on additional responsibilities, his relationship with his supervisor and the fact that he had been difficult with respect to the termination of his employment. However, the court ruled that none of these factors were relevant and that the discretion to pay a bonus could have and should have been exercised by merely considering the employee’s performance.7 Such a ruling accords with the implied duty of trust and confidence in that the employee could reasonably expect to rewarded for his or her performance. There are however, some factual differences between the wording of the bonus provisions in the contracts in Keen and Clark. As Burton J. held in Clark, the wording of the contract with respect to the bonus payable on the basis of the employee’s performance imposed a “contractual straitjacket” on the employer in terms of the discretionary bonus.8 Even so Burton J. said that regardless of contractual straitjackets, a discretion on the part of the employer must however, always be exercised in good faith.9 Similarly, in United Bank Ltd. Akhtar the Employment Appeals Tribunal ruled that even in cases where the discretion is minimal, it must not be exercised in a manner that could be construed as capricious.10 It was also held in White v Reflecting Roadstuds Ltd by the Employment Appeals Tribunal that the discretion must not be exercised in the absence of sufficient or reasonable grounds.11 Each of these rulings are consistent with the implied duty of trust and confidence in that the employer is required to act in good faith and to treat the employee with due respect and consideration. In Clark however, Burton J. ruled that the tests of reasonable and sufficient grounds and the requirement of capriciousness, while persuasive is not conclusive evidence of a lack of good faith in the exercise of the employer’s discretion. The application of the perverse and irrational test is preferable and far simpler to apply. In this regard, the court would simply: Ask the question whether any reasonable employer would have come to such a conclusion.12 Taking this approach into consideration and the wording of the bonus clause in the contract of employment the court felt that based on the employee’s performance the decision to pay out a nil bonus was “plainly perverse, irrational and if such be necessary, capricious”.13 The fact that the employee in Keen received a bonus that was contested on the grounds that it fell below the recommended amount on the basis of a wider discretionary clause distinguishes the facts from the facts in Clark. However in Mallone v BPB Industries Ltd. the Court of Appeal interpreted a wide discretionary bonus on the same basis as the court did in Clark where the discretionary bonus was very narrow. In Mallone the bonus was dependent upon the employer’s absolute discretion. Even so, the court was prepared in Mallone to apply the test of whether or not a “reasonable employer could have reached” the decision that it did with respect to the bonus.14 The distinction between cases like Keen and cases like Clark where the employee receives a bonus which is disputed on the basis of its size and Clark where a bonus is denied when the contract of employment allows for a contractual or discretionary bonus is the application and construction of Section 13 of the Employment Rights Act 1996.15 By virtue of Section 13 if a bonus is contractual as it was in Clark, the employee has a right to claim an unlawful deduction of his/her wages when the bonus is denied.16 In fact it was held in Farrell Matthews and Weir v Hansen that by virtue of Section 13(3) of the Employments Rights Act where a discretionary bonus is declared a wage, the employee has a right to claim the bonus.17 Ultimately, the court looks at the bonus clause in the contract of employment and whether or not it is reasonable in the circumstance to regard the refusal to pay the bonus or the deduction of that bonus as an unlawful deduction of wages pursuant to Section 13(3) of the Employments Rights Act.18 Keen is obviously directed by the common law principle that where a bonus is entirely discretionary the employee has no right to make a claim for non-payment of the bonus or to dispute the amount of the bonus.19 This is particularly important in light of the economic climate and confers upon the employer some room for fettering the discretion to pay out a bonus in circumstances where the company’s performance and the overall economic climate could be a factor in terms of the size or the bonus or the decision to pay out a bonus. However, if the contract’s bonus clause is worded in stricter terms it is entirely unlikely that the employer would have the right to rely on any of these factors. Therefore, if employers ensure that the bonus clause in the contract is such that it confers a wide discretion with respect to the distribution of a bonus, the employee will have a difficult time contesting the size or the bonus or the refusal of a bonus given the current economic climate. Cantor Fitzgerald Intl v Horkulak also demonstrates the court’s willingness to look at the practical realities of the overall situation in looking at whether or not to pay a discretionary bonus on the basis of an express or implied term of a contract of employment.20 In this case the court was prepared to look beyond the wording of the contractual terms relative to the bonus and looked at the implied term of trust and confidence. In this regard the court ruled that in the employee’s trade, the employee as a senior employee in a competitive market where bonus payments were the norm and was therefore entitled to regard the bonus payment as a part of his salary. This was so regardless of the discretionary bonus clause in the contract of employment.21 Taylor v Motability Finance Ltd. appears to be consistent however with the decision in Keen. In this case the employee’s claim, like the claim in Keen was about the amount or size of the bonus paid out. The High Court in Taylor determined that there was no evidence that the bonus had been paid in bad faith.22 Again the emphasis appears to be on evidence of bad faith, although Keen emphasized that the employee must put forth evidence that the payment of the bonus in terms of the disputed amount was rendered in a perverse and/or irrational way.23 Ultimately, the circumstances of the business, the employee’s performance and expectations are measured in determining whether or not the refusal to pay a bonus or the payment of a relatively smaller bonus is such that it contravenes the implied duty of trust and confidence. It was ultimately stated by the UK Employment Appeals Tribunal that the position with respect to the discretionary bonus is that: Until the discretion is exercised in favour of granting a bonus, provided that the discretion is exercised properly, no bonus is payable. Once however, an employer tells an employee that hs is going to receive bonus payments on certain terms, he is, or ought to be obliged to pay that bonus in accordance with those terms until the terms are altered and notice of the alteration is given.24 Essentially, the discretion to award a bonus is required to be exercised both genuinely and rationally. The court’s message in Keen is obviously one that departs from the trend in employment law. It no longer takes for granted that the employee is entitled to a bonus on the strength of the employment contract and the implied duty of trust and confidence will not automatically be defeated by withholding a bonus or the payment of a smaller bonus than expected. Previously the requirement of good faith and reasonable grounds were applied in favour of the employee. This was obviously consistent with the implied duty of trust and confidence. Keen’s message is clearly that the courts will no longer systematically nor lightly interfere in the employer’s decision to award or not to award a discretionary bonus under the discretionary bonus clause in an employment contract.25 The court was clear that in order to prove that the discretionary bonus was irrational or perverse, independent evidence would be required given the fluctuating market and labour conditions. In this regard, the economic conditions appear to be the primary policy consideration in the Keen case so that the established principles of trust and confidence that generally apply in favour of the employee have taken a backseat to a more profound public policy issue. The difficult economic times that basically provide the employer with some leverage with regard to making a discretionary bonus payment. Ultimately, the decision in Keen can be used by employers to refuse bonus payments or to alter the amount expected, provided the economic conditions continue and the bonus clause is worded in broad enough terms to permit an escape from liability. Keen appears to uncharacteristically favour the employer and for that reason will likely be talked about for at least a decade as more and more employers manipulate their bonus clauses so as to be broad enough to escape liability for payment of a discretionary bonus. It is doubtful however, that the courts will continue to favour the employer should the economic downturn reverse itself. Bibliography Bell, A. (2006) Employment Law. Sweet and Maxwell. Cantor Fitzgerald Intl v Horkulak [2004] IRLR 942. Clark v Nomura International plc [2000] IRLR 766. Employment Rights Act 1996. Farrell Matthews and Weir v Hansen [2005] IRLR 160. Keen v Commerzbank AG [2006] EWCA Civ 1536. Mallone v BPB Industries Ltd. 2002 EVCA Civ 126. Moffatt, J. (2007) Employment Law. Oxford University Press. Selwyn, N. (2008) Selwyn’s Law of Employment. Oxford University Press. Taylor v Motability Finance Ltd. [2004] EWHC 2619. Unfair Contract Terms Act 1977. United Bank Ltd. Akhtar [1989] IRLR 507. White v Reflecting Roadstuds Ltd [1991] IRLR331. Wynn-Evans. (2007) “Discretionary Bonus Awards, UCTA and the Duty to Giver Reasons: Commerxbank AG v Keen.” Industrial Law Journal Vol. 36: 207-213. Read More