Bonus Decisions – further support for employer discretion

Bonuses and commission are well established in the recruitment industry culture. The benefits are bountiful. It motivates your consultants and generates income to your business which in turn leads to sometimes sizeable bonus payments to your staff.  Everybody wins.

Until the working relationships become strained. Even the most amicable parting of ways tend to have some contention as to whether, and if so how much, bonus is payable. In the absence of clear contractual provisions there can be ample room for disagreement and discrepancy between the recruitment consultant’s and the recruitment business’ respective expectations. It is common practice that bonuses, especially if sizeable, are discretionary. Much litigation has passed through the courts on the exercise of this discretion, most recently in the case of Paturel v DB Services (UK) Limited.

This case gave some reassurance to employers in that the High Court held that courts will not seek to interfere with the exercise of an employer’s discretion when awarding bonuses, provided that the decision made by the employer is not irrational or perverse. Mr Paturel was unhappy about being awarded a 1% bonus whilst his colleagues were awarded 8% and 11% respectively of the profits they had generated. It may not seem as a stark difference, but in cash terms this meant that in 2008, Mr Paturel received EUR 1.3 million and his colleagues received EUR 34 million and EUR 84 million.

Mr Paturel’s claim failed on all accounts. He argued that his employer had breached an express term in his contract because he did not get a bonus that was “broadly consistent” with his peers. In his mind, his employer had breached an implied term to act in good faith and not irrationally when awarding his discretionary bonus.  Mr Paturel’s claim primarily failed because of the fact that his colleagues’ bonuses were based on a formula in their employment contract, which meant that the employer was obliged to pay higher bonuses. The High Court also held that, on these facts, the bank had not acted irrationally or perversely.

If you operate a bonus or commission scheme it is advisable to review both your employment contracts and the rules of your schemes so that you have it clear in your mind what factors are relevant to exercising your discretion. Acting in good faith and not making capricious or irrational decisions as to whether to pay or not to pay your consultants is a good place to start.