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Employers need to think twice when promising bonuses!

31-05-2013

The sizeable bonuses paid to city bankers may seem worlds apart from small business, but there is a lesson for employers to learn following a recent Court of Appeal ruling. Julie Taylor, Employment Associate at Gardner Leader explains:

The Court of Appeal has held that a promise made to a group of bankers that there would be a guaranteed bonus pool available was legally binding (even after the bank was taken over by another bank) when an attempt was made to cut back the bonus pool.

The case arose as a result of an announcement made in August 2008 by the CEO of Dresdner Kleinwort’s investment banking division at a general “town hall” meeting to employees at which a guaranteed minimum bonus pool of €400 million was promised to be available for dividing up on a discretionary basis according to individual performance. The bonus pool had been approved by the board in an effort to stop key staff leaving as the business was being sold. The terms of the bonus were later set out in writing in December 2008, which added further conditions.

Dresdner Kleinwort was subsequently taken over by Commerzbank, who reduced the bonus pool by 90% in 2009, seeking to rely on the “material adverse change” clause included in the December 2008 letters and asserting that the staff communications were not contractually binding.

In 2012, the High Court ruled that the intention of the collective staff announcement was to create a legally binding obligation and so the reduction in the bonus pool was a breach of contract. The bank appealed against the ruling, but this original decision has now been upheld by the Court of Appeal notwithstanding Commerzbank’s arguments that they had had no intention to establish legal relations through the original announcement and that the terms were uncertain amongst other points.

The Court ruled the announcement was certain and therefore capable of being a formal offer and the method of delivery removed the need for formal contractual acceptance.
The Court also rejected the bank’s claim that there was no consideration for the benefit by the individual employees, highlighting that effective consideration could be demonstrated by the employees deciding to stay at the bank.

The ruling also confirmed that where any new conditions are introduced into an existing contractual relationship, there would be a strong presumption that it was intended to be legally binding. Therefore, it was down to the employer to make it clear if there was no intention to create a legal obligation.

The Court ordered that the bonuses were paid.

This decision has significant implications for employment contracts and potentially opens the way for promises made by employers during general staff communications to become contractually binding. Therefore employers will need to be very careful in the statements they make at group employee meetings to ensure that a discussion remains just a discussion.

For more information please contact Julie Taylor


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