Date01 December 2012
Published date01 December 2012
AuthorRavi CHANDRAN LLB (Hons) (National University of Singapore), LLM (Cantab); Associate Professor, School of Business, National University of Singapore.

The issue of bonuses paid to some, such as bankers and chief executive officers, has attracted much attention in recent times. The aim of this paper is to examine the details relating to bonuses, both guaranteed and discretionary. Some drafting perspectives with respect to bonuses are also considered with the view of the employer in mind. However, while the main focus of the paper is on bonuses, many issues which are discussed may be equally applicable to other payments such as commissions and severance benefits.

I. Guaranteed bonus

1 It is not uncommon for a contract1 to provide for a guaranteed bonus2 as this helps to attract employees to the job and to retain them. Sometimes, no conditions may be attached to the guaranteed bonus as is often the case with annual wage supplements. However, conditions may sometimes be attached. Such conditions may either be positive in nature, such as stating that a certain sales target must be attained, or negative in nature, such as stating that there must not be any gross misconduct or negligence. Many issues arise in relation to guaranteed bonuses and these are discussed below.

A. Burden of proof

2 Assuming the guaranteed bonus has conditions attached to it, the first question that arises is who has the burden of proving that the stated conditions have or have not been satisfied? In Chew Nam Fong Ronny v Continental Chemical Corp Pte Ltd,3 the plaintiff whose contract was terminated by salary in lieu of notice sued his employer for severance payments allegedly owed to him under his contract of

employment. The contract provided: “Should your employment be terminated by the Company for reasons other than poor performance, gross negligence, gross misconduct or criminal conviction in a Court of Law, you shall be paid severance payment of two times annual salary.” Lai Siu Chiu J held:4

Where, as in this case, there is a provision in the employment contract stipulating severance payment when employment is terminated except for certain reasons, it is in all likelihood the parties' intention that the employer must prove that the termination of employment was for one of those reasons. This is generally due to the fact that in most cases, it is the employer who has the particular knowledge of why the employment was terminated.

This is indeed correct, but on the facts, the plaintiff had also sued for the annual bonus. In this connection, the contract stated that the employee “will participate” in the bonus, but that the amount would depend on the employee's performance. The bonus clause also went on to set out the formula for the bonus. The bulk of the judgment related to severance payments, but after the employer established that there was indeed poor performance, the court concluded:5

It is the prerogative of the plaintiff's employers to set certain performance targets. In the absence of a convincing justification, the failure to achieve those targets constitutes poor performance. For these reasons, the second defendant has succeeded in proving that the plaintiff's employment was terminated for poor performance. It follows that the plaintiff was entitled to neither severance payment nor performance bonuses under the contract of employment.

It is suggested that since the court had already come to the conclusion that the plaintiff's performance had been poor, the court went on to hold that the plaintiff was not entitled to the bonus. This should not be interpreted to mean that if the contract merely set performance targets to be met, it is for the employer to prove that these have not been met. Going by the court's reasoning highlighted earlier, since this would be something within the knowledge of the employee, and since it is the employee who is bringing the claim, it should be for the employee to prove that the performance criteria set have been met.

B. Considering other factors

3 Assuming the guaranteed bonus has certain conditions attached to it, the question might arise whether the employer can then consider other factors not listed. The issue arose for consideration in Clark v Nomura International plc.6 In this case, Clark was a senior proprietary trader in equities and he sued in respect of a bonus. The contract provided that the bonus was dependent on “individual performance”. Appendix A to the contract provided that “individual bonus” was dependent on “corporate contribution, team-working, capital usage and due regard to risk”. The English High Court held that in considering “individual performance”, it was legitimate to take into account the factors listed in Appendix A, though Appendix A was in reference to a different time period and not the time period in question. The court also held that “individual performance” referred to performance of the contract by the individual in question and thus, for instance, if a senior trader was involved, his individual performance must be judged against his contractual obligations as a senior trader. However, the court held that it was not possible to take into account other conditions which did not relate to “individual performance”, such as the company's legitimate business needs and need to delay bonus payments in order to retain employees. In relation to the company's legitimate business needs, if, for instance, the company is not doing well, it may be argued that it could not been envisaged by parties that the company would nonetheless pay a bonus. On the other hand, it may be argued that “precisely because of the uncertainty, it might be that the bank was keen to confer a real incentive to a trader … The point is neutral”.7

4 Thus if specific conditions are attached, these may be viewed as being exhaustive. Therefore, great care must be employed in drafting the conditions. One way out for employers might be to state that the conditions stated are not meant to be exhaustive, though that might make the guaranteed bonus more like a discretionary bonus and that may not be acceptable to high level employees who have some bargaining power.

C. Varying the factors

5 If the employer does have some specific conditions, it would also not be possible to unilaterally vary those conditions, unless the contract has an express clause clearly allowing such variations or unless

some other exception, such as estoppel, applies.8 However, in relation to an express clause allowing a variation, in Bateman v Asda Stores Ltd,9 the UK Employment Appeal Tribunal held that a variation pursuant to a variation clause should be exercised in a way that does not breach the implied term of trust and confidence,10 although the case related to a variation of a salary structure and not a bonus scheme. Similarly, in Riverwood International Australia Pty Ltd v McCormick,11 the Federal Court of Australia stated that “[i]ts power to change its policies, or to introduce new policies, from time to time would be constrained by an implied term that it would act with due regard for the purposes of the contract of employment … so it could not act capriciously”, though again the variation in question did not relate to the payment of a bonus as such.

6 That possible hurdle aside, much depends on the construction of the clause in question and thus again much thought is needed in drafting the variation clause. In Khatri v Cooperative Centrale Raiffeisen-Boerenleenbank BA,12 Khatri was employed by the defendant bank as a derivatives trader and he sued for non-payment of bonus when he was eventually dismissed by the bank on grounds of redundancy. There was a formula attached to the payment of the bonus, but the contract contained a clause which stated: “The above table is applicable to your 2008 bonus. The bank maintains the right to review or remove this formula-linked bonus arrangement at any time.” The English Court of Appeal, construing the contract against the factual matrix, held that the clause meant that while the formula could be changed, it did not mean that the bank could decide not to pay any bonus at all.

D. Pro-rating

7 Another issue relates to pro-rating. For instance, if the employee goes on maternity leave, sick leave, reservist leave or is placed on garden leave, can the guaranteed bonus be pro-rated? Since, in all of the above situations, the employee would still be an employee, it is suggested that he would be entitled to the full bonus, notwithstanding that he has not been employed for the whole period. It is also unlikely that there is an implied term (in fact) to the contrary effect, as it would not be necessary for the business efficacy of the contract and it is not so obvious that it

goes without saying.13 This is because one of the reasons for a bonus is to help retain employees and even if an employee is on maternity leave,14 sick leave or reservist leave, paying the employee a bonus which has not been pro-rated would act as a further incentive for the employee to stay. In relation to garden leave, the employee would not be working during the period of leave and during such period, the employee is likely to be deprived of an opportunity to practice his skills and a bonus which is not pro-rated is likely to have been one of incentives which made him agree to the garden leave provision in the first place. Nonetheless, having said that, since implied terms (in fact) ultimately turn on the intention of the parties, much depends on the actual facts including the reasons (if any) for the bonus as stated in the bonus clause.

8 Whatever it is, from the employer's perspective, it is best to have an express clause which allows pro-rating and it should list all the situations whereby such pro-rating may be carried out. If there is a general pro-rating clause according to the period of time worked without listing the specific situations, this may give rise to some uncertainty. In addition, if there is such a general clause, the relationship between such a general clause and the other clauses relating to the bonus, in...

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