The Court of Appeal recently upheld the EAT's decision in a case concerning bonuses promised to bankers prior to the sale of their employer.
The Employment Appeal Tribunal's previous decision in the case of Dresdner Kleinwort Limited and Commerzbank AG v Attrill and Ors was confirmed by the Court of Appeal: Dresdner was contractually bound to pay out bonuses from a guaranteed pool promised to the workforce prior to the sale of the bank to Commerzbank in 2009. The promise had been given in an attempt to stabilise the workforce and in the context of unprecedented turbulence in the financial market.
Following the sale of the bank, the new owners inserted a "material adverse change" clause (MAC) into bonus letters sent to staff saying that bonuses would be adjusted if revenues turned out to be severely reduced. No such caveat had been mentioned when Dresdner's then chief executive had announced that bonuses would be paid from a guaranteed bonus pool at a "town hall" meeting.
This was against the backdrop of many key staff leaving the bank due to uncertainty about its future, the bank had been urged to take action to stabilise its workforce by the Financial Services Authority.
The Court accepted evidence that the announcement had been widely interpreted by staff as meaning that the pool was guaranteed "no matter what" and that this had swayed many individuals to stay on at the bank when there were still good opportunities at other organisations they might have persued.
In the context of the global financial crisis, the collapse of Lehman Brothers and the German Government's eventual bail out of investment banks the bonuses were indeed adjusted, in some cases down to nothing.
The Court of Appeal was required to consider whether the announcement of the bonus pool, in the informal setting of a town hall meeting, created a binding obligation to pay and whether the MAC clause was a breach of the implied duty of trust and confidence?
Court of Appeal decision
The court decided that the announcement was contractually binding and that the decision to withdraw the bonuses was a breach of the implied term of trust and confidence.
The court was not persuaded that the bank did not intend to create legal obligations when it made its announcement of the guaranteed bonus pool. It was equally dismissive of arguments that the construction of a variation of contract clause in the bank's staff handbook should be such to prevent the existence of a varied contractual term in the circumstances. Given that the bank could show no good evidence for its eventual decision to adjust the bonuses, the Court was persuaded that this was a breach of the implied term.
Although this long-running case has been portrayed in the media with little sympathy for the bankers involved and the circumstances of this case were particularly extreme i.e. the financial meltdown of 2009, employers can draw important lessons from it.
- Employers need to be particularly careful when discussing bonuses and any other valuable benefits with employees to avoid creating binding contractual undertakings, if this is not what is intended.
- Where an employers has a unilateral power to vary employees' terms and conditions, this should be subject to clear and express conditions as to how it will operates and how a valid variation will be communicated. Not only will this avoid maverick managers making unauthorised promises, it will also avoid uncertainty as to whether or not a purported variation has in fact been validly made.
- Employers should avoid making general announcements to their organisations without recording the detail of that in writing - in this case no contemporaneous record had been kept of the original announcement of the bonus pool at the town hall meeting.
- Where a one-off bonus or benefit is being offered, employers should be careful to make crystal clear to employees the circumstances in which (if any) the bonus may not in fact be paid. Provision should be made for some "wriggle room" where this is reasonably needed by the employer. Usual force majeure events, such as a serious deterioration in a company's financial position, would not be unreasonable to flag up to employees - however unlikely these may seem at the time of any announcement.