A word of warning
The wording of bonus schemes seems a continuous source of revenue for lawyers when employer and employee fall out. Ostilly v Meridian Global VAT Services Ltd is a case in point.
Mr. Ostilly’s contract of employment read “you will be entitled to a maximum annual bonus of 20% of your salary which will be tied to your own performance and that of your market region”.
In the event no real attention was paid to this wording. Mr. Ostilly was not assigned to a market region and because he was doing well his bonuses regularly exceeded 20% of his salary.
In 2016 his salary was £94,742 and his bonus was £55,000 despite the fact that the company was losing money. Things got messy towards the end of 2017 and costs had to be cut by Meridian. A pay freeze was imposed, and a decision taken to pay no bonuses to anyone.
Unfair Constructive Dismissal
Mr. Ostilly resigned and brought claims of unfair constructive dismissal and breach of contract. The breach of contract claim was for a bonus of at least £55,000. One of the questions before the Employment Appeal Tribunal (EAT) was, given the wording of Mr. Ostilly’s contract, was the employer entitled to take into account the financial performance of the company in deciding whether to give Mr. Ostilly a bonus.
In finding for the company the EAT judge concluded that the company could take into account its own finances because there was nothing in the wording of the clause which made it clear that the company’s own financial performance would not be taken into account.
A very sensible decision.
Lessons to learn
The likelihood is that both parties incurred very significant legal costs both before the Employment Tribunal and subsequently before the Employment Appeal Tribunal. This waste of money could easily have been avoided by the employer if it had very carefully spelt out in the contract that there was no contractual entitlement to a bonus scheme and that any bonus would not only be noncontractual but would be entirely at the discretion of the employer.
If it's necessary for the employer to detail the terms of a bonus scheme, make sure that it is given plenty of thought before it is issued, that it is not part of the employees contract, that it gives the employer as much discretion as is sensibly possible and is simple clear and easily understood. This way the risk of parties falling out and suing each other is significantly reduced.