Employment Law E-Bulletin

Cases: Sept 2007

Refusing to Award Bonuses

The recent high court case of Ridgway v JP Morgan Chase Bank National Association saw the court return for another look at the issue of when employers can use their discretion and decide not to award bonuses.

Mr Ridgway had been employed by JP Morgan for eight years when he asked to take a year’s sabbatical in early 2003. The company agreed to the request and sent him a letter confirming this but also explaining that he would still be considered for a discretionary bonus for the part of 2003 that he actually worked prior to the start of his sabbatical.

When it came to the time to award the bonuses, JP Morgan decided to award Mr Ridgway a ‘nil bonus’ on the basis that, during the period prior to his sabbatical he had made a trading loss of £2.3 million and had not demonstrated any non financial contribution to the company. When Mr Ridgway eventually resigned and brought claims for damages for breach of contract, one of the grounds of his claim was that this decision was irrational and perverse (and therefore a breach of the implied term of trust and confidence) because no proper assessment or performance review had been carried out.

Thankfully for employers, the High Court has disagreed. Although the Court held that the company had not conducted a thorough assessment of Mr Ridgway’s performance, in light of the £2.3 million trading loss, the Court decided that this was not relevant.  The losses were held to be a clear indication of poor performance and that this clear financial indicator took the decision out of the realms of irrationality or perverseness.

This decision lends strong support to an employer’s right not to award a discretionary bonus, without having to do an in-depth investigation, in circumstances where there is obviously poor performance. However, employers should still take care to assess discretionary bonus awards on a case by case basis because, without such a clear deciding factor, the decision to award nothing will always be a risky one.

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Failing to Notify the Employee of the Right of Appeal

Although we are all fairly certain that the statutory procedures as they are now will eventually be amended, they remain with us for the foreseeable future and continue to produce vast amounts of litigation of which the case Apituit (Edinburgh) Ltd v Kennedy  is the most recent.

This case raised the interesting question of whether the right to appeal which must be given to the employee in order to comply with step three of the statutory disciplinary and dismissal procedure (the ‘SDDP’)can be given orally. The case also addressed the question of what factors should be used when deciding upon the level of the uplift that must be awarded under the legislation when an employer fails to follow the procedure.

Following internal discussions about cost cutting measures, Apituit decided that various redundancies needed to be made and Mrs Kennedy’s post was one of those identified as being at risk. Mrs Kennedy was notified of this and asked to discuss her position with the management. After various discussions, Mrs Kennedy was told that the decision to make her redundant had been made and that her employment would terminate in March 2005. Discussions then continued but Mrs Kennedy did eventually leave, later claiming that the dismissal had been unfair because of failures in relation to the selection process.

Apituit accepted that Mrs Kennedy had not been advised of her right to appeal in writing but argued that this was not required under the SDDP. The Employment Appeal Tribunal (the ‘EAT’) agreed, stating that provided the option to appeal is communicated to the employee then the SDDP will have been complied with. The EAT did stress, however, that it would be prudent for employers to make the offer in writing and we would advise that you continue to do so. However, the decision confirms that, as long as the employee has been told that they can appeal, the employer will not be penalised. Nevertheless, as with everything in employment claims, it is much more difficult to prove that you have done something unless it is in writing.

Compensation Uplift

In the above case of Apituit (Edinburgh) Ltd v Kennedy, the EAT also went on to address the question of how much a compensation award should be uplifted for failure to follow the statutory procedures. On the facts of the case, the EAT decided that the 40% that had been given was too much. The EAT specifically noted that the uplift must be at least 10%  but can be between 10% and 50% if it would be just and equitable to increase the uplift in the circumstances.

This has become an area of increasing uncertainty and one which was also tackled by the EAT in the case of Cex Ltd v Lewis. Mr Lewis was a pricing director for a retail business. CEX underwent a restructuring and the employee had to apply for the new position that incorporated his old job. Mr Lewis was unsuccessful and he was dismissed on the grounds of redundancy. The procedure that Cex followed in dismissing him did not comply with the statutory minimum requirements and subsequently an uplift of 10% was added to the damages. The Tribunal held that a 10% uplift was appropriate because the failure to comply with the statutory minimum was due to a lack of knowledge on the part of the employer and not to a deliberate disregard for the rules. The EAT was critical of the Tribunal for considering ignorance of the law as an excuse, but refused to set down any specific guidelines on how the uplift should be applied or to overturn the decision.

In other cases lack of knowledge of the law has been held to justify the maximum increase on the basis that employers should be “punished” for not even bothering to educate themselves meaning we are no nearer to being able to give you a clear indication as to how the uplift will be applied. The lesson to be learnt from the decision is that a consistent approach has not yet been decided and therefore employers cannot be certain as to what will happen. As a result, the only safe course of action is to continue to follow the statutory procedures in full so that the question of an uplift is not relevant.

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For further information on how these cases might affect you, contact the employment law team of Burnetts Solicitors on 01228 552222.

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