Guest comment: Redundancy and your rights to a bonus

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Philip Landau, partner at London law firm Landau Zeffert Weir, says banks hold most of the cards when it comes to bonuses and redundancies.

Announcements in this and recent weeks suggest the investment banking industry is once again getting ready to slash staff and cut costs. What are your rights to an annual bonus if you find yourself at the sharp end of this policy?

Unfortunately, they may be fairly few, depending on how the bonus clauses in your contract are drafted. Most bonus schemes operated by City employers are discretionary in nature: employers have maximum flexibility in determining the level of awards to be made. Moreover, a well-drafted bonus clause will typically allow the employer to reserve the right to make payments based on a number of factors other than simple performance - including a requirement that employees are still working there, and not under notice, at the date bonuses are paid out. Put simply, therefore, if you lose your job, you lose your bonus.

What legal recourse do you have in this situation? Often (and this is especially the case with traders), the employee will argue that they have earned significant money for their employer that year and should not be penalised simply because they have been made redundant, or left for some other reason, before the bonus announcements and payments were made.

Unfortunately, however, the chances of succeeding with this kind of argument diminished considerably late last year. In 2006, James Keen, a former star trader with Commerzbank, sought to challenge a provision in his contract that no bonus would be paid to him if he was no longer employed, or on notice (whether given by him or the bank), at the date when the bonus was paid. Keen claimed he was owed millions of euros for the half year he had worked prior to his redundancy. During this time, Keen made a priofit of €46.5m. In addition to arguing that the bank had exercised its discretion perversely, he argued that the provision in his contract which prevented him from being paid was "an unfair term" and therefore unenforceable under the Unfair Contract Terms Act (UCTA) 1977.

The Court of Appeal did not prove sympathetic. It held that the clause in Keen's contract that exonerated the bank from paying a bonus if he was no longer employed was clear, and therefore prevented him from making a claim. It also unanimously rejected the argument that the clause was unfair under the UCTA.

What does this mean if you find yourself in a similar position - chasing a bonus after working for part of the year only? The good news is that some banks are making pro-rata bonus payments regardless of the contractual position. This 'custom and practice' can be very useful to disgruntled employees who feel they've been singled out for non-payment of a bonus because they weren't employed at a particular date.

In addition, despite the decision in the Keen case, the courts may well be prepared to find another way to challenge an employer's decision, where that decision has so obviously been made to avoid the bonus payment. Watch this space!

Feel free to contact Philip on or 020 7357 9494 for a free consultation on this or any other employment law issue.

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