The Economic Downturn

Bonuses, and in particular those awarded in the banking sector, are an issue currently receiving a lot of media and political attention.  As unemployment figures continue to rise, it seems inevitable that bonus culture in the UK will come under further scrutiny. 

Whilst calls for bonus payments to be stopped are widespread there are important employment and contractual legal issues to bear in mind when considering altering terms and conditions of employment (whether in respect of bonus, hours, pay or otherwise):

The first step is to identify the contractual terms:

• Whilst all employees who have been employed for one month or more are legally entitled to receive a statement of terms and conditions of employment, the absence of a written contract does not necessarily mean that a contract does not exist. 
• Employers should review any expressly agreed terms, those which may be implied (for example, by custom and practice) and those incorporated by collective agreements. 

Once the terms of the individual contract of employment have been identified the next step is to gauge the amount of flexibility contained within the written contract:

• A general flexibility clause which states, for example, “We reserve the right to make reasonable changes to any of your terms of employment” will not be sufficient to rely upon, particularly where changes are proposed to hours or pay.
• However a specific flexibility clause may provide an employer with a route through which change can be achieved, provided the clause authorises the desired change and is applied reasonably.

Does the clause authorise the desired change?

• Any power to unilaterally vary contractual terms must be unambiguous.  Employers should be aware that if there is any ambiguity the court will interpret the contractual term against the party who is seeking to avoid its obligations.

Has the employer acted reasonably?

• Even if the specific flexibility clause is unambiguous, this does not necessarily give an employer carte blanche to impose change. 
• This is because all contracts of employment contain an implied term of trust and confidence and the parties to the contract should not act in any way that would destroy or seriously undermine this. 
• Taking this into account, employers should carefully consider effect of the proposed course of action.  An employee who believes that the relationship of trust and confidence has been breached may resign and claim constructive dismissal. 

For example could a change to, or removal of, a bonus scheme result in such a breach, even where the bonus scheme is stated as discretionary or change is expressly authorised?

• The answer potentially is, yes.
• The non-payment of a bonus is likely to directly affect how much money an employee earns in a particular period.  The non-payment is therefore likely to amount to a fundamental and detrimental change to the employee’s terms and conditions of employment.
• Consequently, whilst an employer may be entitled to reply upon a flexibility clause or exercise his discretion, he cannot exercise such rights irrationally or perversely.  The courts have held that the non-payment of a discretionary bonus can amount to a breach of contract. 

Where there is no written contract or the contract does address the term the employer proposes to vary, (for example if the payment of an annual bonus is not detailed in a contractual document, but has become incorporated via custom and practice), employers must consider alternative methods for change:

• The ideal method of securing change is via agreement with the employee, preferably confirmed in writing immediately thereafter. 
• If change cannot be agreed, and the employer still wishes to proceed, he may elect to impose the change.  In many cases this will unpopular with the employees who may decide to “stand and sue,” continuing to work for the employer whilst pursuing a breach of contract and/or unlawful deduction from wages claim.  Alternatively the employees may allege the employer has breached the relationship of trust and confidence and resign claiming constructive dismissal.
• The final, but by no means ideal method due to the potential for unfair dismissal claims, is to dismiss the employees and offer re-engagement on new terms.  However, is not an option to be taken lightly, nor without the benefit of legal advice.

Whilst this article has centred on bonus arrangements, the issues highlighted above are equally applicable to proposals to reduce hours of work, pay etc.

Of course, every employer has commercial decisions to make, and in these challenging financial times, such decisions may be both more frequent and far reaching.  Employers would be well advised to be transparent with their employees, review their current contractual arrangements and historical payments, and carefully consider the rationale and business case behind any proposed changes before taking action.

If you would like to discuss any of the issues raised in this article, please contact Karen Moore, Associate Solicitor, Employment Department, on Belfast 028 9055 3300 or by email, karen.moore@tughans.com