Employee bonuses have always been viewed as a great incentive for employees. Employers now have the choice to reward their staff on a discretionary basis; once contractual criteria has been met. Tom Fancett, Associate at Dentons addresses how employers can protect themselves in circumstances where they have to recoup the reward

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Traditionally, an employee’s entitlement to a bonus, whether fixed or discretionary, has been regarded as a contractual issue; once the payment conditions of the bonus scheme were met, the employee was entitled to their bonus payment and that was the end of the matter.

In recent years however, and particularly since the financial crisis of 2007-2008, regulatory requirements and mounting pressure from investors have seen many employers in the financial services sector adopt claw-back and malus provisions in their bonus arrangements. These allow them to reclaim part or all of an employee’s bonus in the event of certain triggers, for example missed targets or employee misconduct. For many regulated businesses, the inclusion of these provisions in a bonus scheme is now mandatory, and failure to include them can result in hefty fines. The regulators imposed these changes in the hope that they might curb the excessive, and on occasion catastrophic, risk-taking which the bonus culture in financial services was thought to have encouraged.

However, the same approach does not seem to have gained much, if any, traction outside the financial services sector. In the absence of formal regulation, what options might be available to employers if they consider that a bonus payment should not have been made?

The UK’s AA motoring organisation faced exactly this issue in October last year, when it hit the headlines for demanding that its former chair, Bob Mackenzie, repay £1.2m worth of bonus payments. The AA made the claim following an alleged altercation between Mr McKenzie and a member of the public, which came to light after his dismissal in July 2017 for a separate altercation with Michael Lloyd, the head of the company’s insurance arm. Despite the lack of any express contractual provision entitling them to do so, the AA argued this second alleged altercation gave them grounds to claim back Mr Mackenzie’s bonuses from the past two years (a reported £700,000 in 2016 and £500,000 in 2017).

At this stage, the legal basis of the AA’s claim is unclear. They may have grounds to argue that Mr Mackenzie’s failure to disclose the earlier incident was a breach of contract on his part and, had they known about it, the bonuses would not have been paid; it is common for senior executive contracts to include clauses requiring them to disclose their own misconduct as well as that of other employees. However, even if this was the case, the right to recoup bonus payments would not follow automatically.

In the absence of any useful contractual terms, the AA might also have given consideration to a civil claim for restitution, on the grounds of “unjust enrichment”. In broad terms, to succeed in a claim for restitution, an employer would have to establish that: (i) the employee has been enriched, (ii) that the enrichment was at the expense of the employer and (iii) the enrichment was “unjust”. It is this third element that is most difficult to demonstrate. The “unjust” factors recognised by English law have traditionally included involuntary payment (such as the accidental overpayment of wages) and instances where there has been a payment made in return for a consideration which has completely failed. But a partial failure is generally considered insufficient to give rise to a claim for restitution. As the law currently stands, whether this remedy could be stretched to cover instances of employee misconduct is questionable.

One other option for employers, where bonus schemes are discretionary or are renewed annually, could be to introduce clawback and malus provisions as a new condition of future bonus payments. This would need to be done carefully to ensure that it does not put the employer in breach of existing contracts, but otherwise makes good sense.

Employment relationships are often entered into with rose-tinted glasses but, as demonstrated in the case of the AA and Mr Mackenzie, they can turn sour quickly. Regardless of the outcome in that case, employers should ensure that any bonus arrangement is carefully constructed and thought is given to all eventualities in which they may want to reclaim any bonus. In the absence of claw-back and malus provisions, employers may find themselves powerless should they wish to recoup an award already made.