Litigation looms over bonuses

Edging a trader out of the bank on trumped-up performance issues, and thereby leaving open the possibility of dipping into their deferred bonus awards in order to fund the cost of attracting new joiners, must be more tempting than ever for some managers.

Therefore, the time is now fast approaching when the High Court is likely to be called on to consider a claim from a departing trader unwilling to accept the compromise deal being offered to them. So what approach is the court likely to take?

The circumstances of the trader's departure will be a key factor. if the trader is dismissed for misconduct or poor performance, then it is less likely that the court will interfere, and rule that the exercise of discretion not to permit the trader to retain their deferred bonus award was carried out in bad faith.

However, where the employer has a genuine belief that the trader has committed an act of misconduct or has performed poorly and this view is erroneously held by the employer, the court may well set aside the employees refusal to permit the employee to keep their deferred bonus payment.

The court is also likely to assist the trader who resigns in response to a fundamental breach of contract committed by their employer.

A key area of legal challenge open for a trader will be to seek a declaration that the deferred bonus scheme itself ought to be set aside as representing an 'unreasonable restraint of trade'.

It is by no means fanciful to believe that the High Court would set aside a deferred bonus scheme on this basis.

In the 1980s it was commonplace for insurance companies to seek to remove the entitlement to post-termination commission from their commission-based insurance agents who continued to work in the industry after leaving their employment.

The High Court in Sadler v Imperial Life Assurance Co of Canada Limited 1988 held that this practice constituted an unlawful restraint of trade and set aside the forfeiting restriction.

Seeking relief from the court on this basis may offer the best legal avenue to a disgruntled trader, particularly in circumstances where the rules of the scheme itself explicitly state, or have the consequence, that the bonus will be forfeited if the trader leaves to join a competitor.

No doubt when the court considers the lawfulness of a deferred bonus scheme in the context of a City trader, this will be a decision eagerly awaited by the many traders who are effectively locked into their employment by the size of their deferred bonus awards and by their employers who may well find that they are not in such a strong negotiating position after all.

For more information, please contact Howard Hymanson.