Open plan

The Louise Barton decision highlights the potential minefield for employers awarding discretionary bonuses. Caroline Carter and Kate Sandison investigate

In the past, remuneration awards have been largely subjective and the process by which they are given has been highly secretive. But as a result of recent tribunal and court decisions, employers that continue such practices now face an increased risk of litigation.

The recent decision of the Employment Appeals Tribunal (EAT) in Barton v Investec Henderson Crosthwaite Securities Limited serves to confirm that this is still the case. The EAT strongly disapproved of the original tribunal's controversial comments that “it is a vital component of the City bonus culture that bonuses are discretionary, scheme rules are unwritten and individuals' bonuses are not revealed” to avoid “invidious comparisons [becoming] inevitable”.

Upholding Barton's appeal against the first instance dismissal of her claim of sex discrimination and breach of equal pay legislation, the EAT stated that it “would certainly wish to make it clear that no tribunal should be seen to condone a City bonus culture involving secrecy and/or lack of transparency because of the potentially large amounts involved as a reason for avoiding equal pay obligations”.

In respect of opaque bonus structures, the EAT in that case made reference to the Equal Opportunities Commission Code of Practice on Equal Pay 1997, which extols the virtues of transparent pay systems, listing the avoidance of uncertainty and perceptions of unfairness, and reducing the possibility of individual claims, among other things.

With this latest decision, it becomes ever harder for employers to retain a significant degree of discretion in the area of staff benefits. Where discretion is retained, there are steps that employers can still take to decrease their vulnerability to successful legal challenges from staff.

Staff training

Staff training is key. The Equal Opportunities Commission (EOC) recommends that all employees should be made aware of an employer's equal opportunities policy, and that those involved in the recruitment and selection process should be given training on the application of the policy.

Employers can be found vicariously liable for the actions of their employees, even if such actions were taken without the employer's knowledge or consent. Vicarious liability is avoided if employers can show that they have taken such steps as are reasonably practicable to prevent an employee from acting in a discriminatory manner.

The onus is on the employer to show that it has taken reasonable steps. The EOC advises, in particular, that managerial, supervisory and personnel staff, especially those involved in the selection process, should be given further training, which should include several elements.

An explanation of the forms that discrimination can take – such as direct and indirect sex discrimination; direct and indirect marriage discrimination; victimisation and sexual harassment – should be included, as well as information that dispels the myth that only men or women possess characteristics that qualify them for specific types of employment or training. Guidance should be given on the unreliability of generalised assumptions and prejudices concerning men and women and the need to avoid basing employment decisions on these assumptions should be highlighted. Training should also stress the need to assess people on their individual merits and

ability to do the job and to avoid letting assumptions about marital status, children and domestic obligations distort objective judgement.

It is also recommended that any equal opportunities policy should be included in all appropriate training courses, such as induction, appraisal and interview techniques, communication skills and supervisory/management development.

The importance of training is emphasised in various codes, including the EOC's code of practice on equal pay, sex discrimination, equal opportunity policies, procedures and practices in employment. While not following the codes does not of itself generate a legal liability, non-compliance may be taken into account by an employment tribunal.

Laying the paper trails

Whether discretion is being exercised in respect of a contractual or non-contractual entitlement, employers must be aware of the importance of paper trails that show the grounds for the exercise of discretion in a particular manner.

Decisions should be minuted contemporaneously wherever possible, giving underlying reasons. Those factors taken into account, as well as those not taken into account, should be included. However, be warned that this will not preclude a court or tribunal from looking behind these written reasons to see if they are genuine.

Employers might wish to consider creating a checklist of the criteria to be applied in reaching a decision, in order to rebut allegations that the discretion has been exercised arbitrarily.

Take a bonus arrangement, for example. It is important for the employer to understand whether the aim of the arrangement is either to reward in respect of past service or to incentivise in respect of future service. The landmark case of Clark v Nomura International plc underlines the importance of not unwittingly fettering discretion when drafting bonus schemes. In that case, had the bonus scheme not been expressed as depending on individual performance, the employer would have been able to argue that a whole range of other factors should be considered in deciding whether to make a payment. The employer was therefore bound to take individual performance as the overriding factor and could not refuse a bonus because the individual was leaving its employer imminently.

>Following the exercising of discretion

So, how should an employer deal with a disgruntled employee – perhaps one who wishes to know why they have not received a bonus, or why their bonus is not larger, or even why they have not been selected to go on a beneficial training course while another colleague has? The implied duty of trust and confidence requires employers not to conduct themselves (without reasonable and proper cause) in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence that exists between the parties to an employment contract.

How much reliance can employees put on this implied term? The implied term does not in fact amount to a duty to act reasonably, as demonstrated many years ago in Post Office v Roberts. Where there is a clear express right for an employer to take or omit to take certain action, this implied term cannot be relied upon, as demonstrated in a more recent Privy Council decision in Reda v Flag Limited.

Regardless of their legal obligations, employers are likely to be best served by being open and helpful to maintain staff morale and good industrial relations. Even without commencing proceedings, disgruntled staff do have avenues by which they can access relevant documentation.

Caroline Carter is head of employment and Kate Sandison a business development lawyer, both at Ashurst Morris Crisp