1. Key FSA and Employment Law Issues for the Financial Services Sector Bonus Litigation – Where are we now? Bettina Bender, Partner CM Murray LLP 17 May 2011 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

2. Bonuses Banking and Financial Services Sector: a different pay structure is typical Comparatively low base with large bonus, although this is shifting Why is this contentious? Recent banking crisis – large bonus culture blamed for excessive risk taking CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

3. Why pay a Bonus? A Reward for Performance A Guaranteed Bonus e.g. Signing on Bonus, Retention Bonus –to attract and retain key performers; often agreed to compensate employees for leaving deferred incentive arrangement at previous employer –NB FSA Remuneration Code CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

4. The Performance Bonus Is it contractual? Is it discretionary? N.B. a discretionary bonus can become contractual over time Is it a hybrid? (there is a contractual entitlement but the amount payable is discretionary ) CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

5. Issues to look for Does a Bonus Plan exist What does the Contract/Staff Handbook say What is the Bonus Year When is the Bonus declared When is the Bonus payable Forfeiture provisions CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

6. Bonuses and Exercise of Discretion Case Law to Date – A Recap CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

7. Lavarack v Woods of Colchester Ltd [1967] 1 QB 278, [1966] 3 All ER 683, CA Facts: L was employed by W Ltd for a term of 5 years from 1 April 1962 on a basic salary and such bonus (if any) as the directors shall from time to time determine. On 27 July 1964 L was dismissed. In 1965 the company revised their salary structure, ending the bonus scheme. L claimed wrongful dismissal claiming damages for loss of salary under the contract and an additional sum representing the salary increase he would have received had he not been terminated. Held (CA): A dismissed employee could not seek compensation for loss of benefits to which he was not contractually entitled and the employee was not entitled to claim the sum he would have received by way of increase in salary in lieu of bonus. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

8. Facts: C had a contract which provided that he would participate in a bonus arrangement providing a maximum of 60% of salary in any year. C was dismissed and claimed compensation in respect of salary increases and bonus payments he would have earned during his 3 year notice period. Held (High Court): The Court was prepared to include anticipated salary increases and bonus payments when calculating damages in respect of the notice period. A discretion to award a bonus should not be exercised 'capriciously. Clark v BET plc [1997] IRLR 348 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

9. Facts: C was employed as senior proprietary trader in equities with a discretionary bonus scheme, based on individual performance. On 13 February 1997, NI dismissed C on 3 months notice to be served as garden leave but paid him no bonus on the bonus payment date of 25 April. Held (High Court): Whilst the dismissal itself was not wrongful, the discretionary bonus would have been due for payment during the notice period (the employee might have expected to receive £1.35m). There would be a breach of contract in relation to an unfettered and absolute discretion if no reasonable employer would have exercised the discretion in that way. This is the test of irrationality and perversity. Clark v Nomura International plc [2000] IRLR 766, QBD CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

10. Facts: Mr Horkulak was promoted to Senior Managing Director in August 1999 on a 3 year fixed term contract with discretionary bonus. He resigned in June 2000 claiming constructive dismissal, on the basis of the bullying behaviour of the President of CF. Held (CA): A term will be implied into an employment contract that a discretion will be exercised bona fide and rationally. Lord Justice Potter said to do otherwise would to fly in the face of principles of trust and confidence which have been held to underpin the employment relationship. Mr Horkulak was on a 3 year fixed contract. If this contract had been lawfully performed, he would still have been in employment at the time the bonuses were payable. Distinguished from Lavarack v Woods as Mr Horkulak was already entitled to a bonus payment under his scheme. Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

11. Facts: Mr Keen was head of the proprietary trading desk for just under three years and was made redundant in June 2005. He participated in a discretionary bonus scheme (with forfeiture provision). His claim was for underpaid bonuses for 2003 and 2004 and non-payment for 2005. Held (CA): Employers do have a wide discretion but this must not be irrationally, perversely or arbitrarily exercised. The burden of establishing that no rational bank would have exercised their discretion in a certain way was a very high one. UCTA 1977, s.3 does not apply to employment contracts at least insofar as they apply to bonuses (employee not consumer) Commerzbank AG v Keen [2007] IRLR 132 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

12. Humphreys v Norilsk Nickel International (UK) Ltd High Court (QBD) [2010] EWHC 1867 Facts: Dr Humphreys was employed as chief economist and entitled to an annual bonus based on a grading by senior management of his performance. When his fixed term contract came to end he was not paid any bonus on the basis of his performance and in particular that he failed to predict Nickel price changes, leading to losses for the company. Dr Humphreys had argued that no-one could have foreseen price changes caused by the global financial crisis. Held: (High Court) The court dismissed Dr Humphreys claim holding that the employers decision not to pay him a bonus was a rational decision, taking in account the groups financial decline and Dr Humphreys inaccurate forecasts which had been a contributing factor. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

13. Bonuses and Contractual Entitlements Case Law to Date – A Recap CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

14. Fish and others v Dresdner Kleinwort Ltd [2009] EWHC 2246 (QB) Facts: The 5 Claimants were part of the senior management team of DK. DK was due to be sold to Commerzbank. To retain key staff they were notified of their bonus payments for 2008. Due to the financial crisis the purchase price was renegotiated and sale brought forward to Jan 2009. Severance agreements were negotiated with the Claimants. The new management then substantially reduced the 2008 bonus awards due to the dire financial outlook. The Claimants were asked to give up their severance payments totalling EUR 12.6 million. Held (High Court): Where a contractual right to a bonus is established, the employer must pay this, even if it is not in the employers best interests to do so. An employer cannot argue that an employees express, implied or fiduciary duty to act in the employers best interests requires them to forego a sum that is otherwise due under their contract. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

15. Facts: T joined BSJ in Nov 2003 on a contract with a min guaranteed bonus and a further bonus sum payable if credits of £20million were achieved. T was dismissed with 4 weeks notice by letter dated 15 November 2004 before the end of the bonus year and before the deal he was working on could be closed. Held (High Court): The employee could pursue a claim that the employer had breached the implied term of trust and confidence by hampering Ts efforts to achieve the sales target and could further pursue the argument that the employer would not terminate the contract, in order to avoid its bonus obligations, prior to the payment date. The Court decided, at a preliminary hearing, that Mr Takacs had a real prospect of showing that this implied term existed, and that the term could supplement rather than be inconsistent with the employers express contractual right to dismiss with notice. This case settled (it will be for another employee to make this argument in the future). Takacs v Barclays Services Jersey Limited [2006] IRLR 877 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

16. Khatri v Cooperative Centrale RaiffeisenBoerenleerenbank BA [2010] EWCA Civ 397 Facts: Mr Katri was employed as derivatives trader. His employer agreed a bonus formula to apply to his future bonus payments of 12% of income generated with a right on the part of the bank to review or remove this bonus formula. Mr K was redeployed and provided with new contractual terms (including restrictive covenants) which he did not sign. Mr K was made redundant and brought a bonus claim on the basis of the formula. Held: (CA) The employee was contractually entitled to the performance bonus as the wording of the provision could not be interpreted as providing for a discretionary bonus, nor had this contract subsequently been varied by agreement. The employer was ordered to pay over £1.6 million in respect of the unpaid bonus. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

17. Locke v Candy and Candy Ltd [2010] EWCA Civ 1350 Facts: Mr Locke was employed as development director of Candy & Candy from 17 September 2007 to 7 September 2008. Under his contract of employment he was entitled to a basic salary and a guaranteed bonus payable after 12 months and subject to him remaining in employment. The contract included a six month notice provision and the company reserved the right to make a payment in lieu of notice. The employer summarily terminated the employment on 7 September, 10 days before the bonus would have become due. Held: (CA) The employees pay in lieu entitlement did not include the guaranteed bonus. The pay in lieu of notice clause did not specify what was payable, but the bonus clause stated the employee had to be employed to receive the bonus. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

18. Attrill and Others v Dresdner Kleinwort Ltd and Commerzbank AG [2011] EWCA Civ 229 Facts: The Claimants were contractually entitled to be considered for a discretionary annual bonus. Earlier than usual, a bonus pool of Euro 400 million was announced to aid staff retention in the lead up to the merger. Following the sale of the business bonus letters were sent out including provisional bonus awards which were said to be subject to review in the event of additional material deviations in revenue and earnings. In February the bonuses were cut by 90% for the majority of employees on the basis of material deviations. The Claimants brought a claim and the employer applied for summary judgment rejecting the claims. Held: (CA) The Court of Appeal refused to enter summery judgment and held the claimants had an arguable case that their discretionary bonus had become a contractual entitlement. This case is now to proceed to full trial. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

19. Litigating a Bonus Claim What are the options Forum: Employment Tribunal, County Court or High Court Costs and Time CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

20. Deduction of Wages Section 13(3) of ERA (Employment Rights Act 1996) where the total amount of wages paid on any occasion by an employer to a worker employed by him is less than the total amount of the wages properly payable by him to the worker on that occasion (after deductions), the amount of the deficiency shall be treated for the purposes of this Part as a deduction made by the employer from the workers wages on that occasion. Wages includes Bonus (Section 27(1) of ERA) Employment Tribunal claim within 3 months of termination of employment or date of deduction The Bonus must be quantifiable (Coors Brewers Ltd v SP Adcock and Ors [2007] EWCA Civ 19 24 January 2007) Awards made under Section 13 of the ERA are not limited by the compensatory award ceiling and a claim for >£25,000 can be brought in the ET CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

21. Tradition Securities and Futures S.A. v Mouradian [2009] EWCA Civ 60 Facts: M was a senior broker on the fixed income desk where he managed a team of brokers. In September 2004 he entered into a 4 year fixed term contract. Under the terms of the contract he was to be paid from a bonus pool of 60% of net billed income less appropriate deductions to be divided as he thought appropriate after consultation with the CEO, payable in cash or into a retirement scheme or employee benefit trust. For the period July to December 2007 M had allocated £100,000 bonus to his team, the remainder to be payable to himself. The bank declared a bonus pool of £1,429,00.60 after deductions including a deduction of £154,286 disputed by M. The net shortfall to M was £92,571.60. M brought an unlawful deduction of wages claim in the ET. The issue in question was whether the amount in dispute was a quantifiable sum. Held (CA): The Tribunal were entitled and obliged to make certain findings of fact and in this case determined that M had sole discretion as the both the amount of bonus and the form of his bonus. The claim could accordingly be heard under the deduction of wages provision. CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

22. Breach of Contract Claim Employment Tribunal claim within 3 months of the termination of employment NB: maximum award is capped at £25,000 CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

23. Discrimination Complaint Employment Tribunal claim that a bonus scheme has been operated unlawfully in contravention of discrimination legislation (sex, marital status, pregnancy, race, disability, sexual orientation, gender re- assignment, age, and religion and belief or less favourable treatment as part-time worker or fixed term employee) Can be brought within 3 months of the discriminatory act or 6 months in an equal pay case Compensation uncapped but loss based CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

24. Unfair Dismissal Claim Employment tribunal claim within 3 months of the dismissal Compensatory awards are capped (currently £68,400) CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

25. Breach of Contract Claim County Court or High Court Can be brought up to 6 years after termination of employment Damages in the County Court are limited to £50,000 but in the High Court these are unlimited High Court action: protracted and expensive CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

26. Conclusion Whether there is an entitlement to a bonus will depend largely on the contractual drafting: clarity and consistency is key In cases of discretionary bonus awards, ensure that any discretion is properly exercised The way bonuses are structured and awarded has changed substantially following the credit crisis and the FSA remuneration code A much larger proportion of bonuses is payable in deferred compensation and how these entitlements can then be realised on termination and in accordance with the FSA remuneration code will become increasingly relevant CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law

27. Speaker Details Bettina Bender, Partner CM Murray LLP 37 th Floor One Canada Square Canary Wharf London E14 5AA United Kingdom If you have any questions, please do not hesitate to contact: Phone: 00 44 (0)207 718 0090 Email: bettina.bender@cm-murray.com Website: www.cm-murray.com CM Murray LLP: Specialists in Employment, Partnership and Business Immigration LawCM Murray LLP: Specialists in Employment and Partnership Law