News & Events

Bonus discretion post-Braganza

Submitted By Firm: Addleshaw Goddard

Contact(s): Michael Leftley, Sarah Harrop

Author(s):

Annabel Mackay

Date Published: 5/5/2016

Article Type:

Share This:

In an article first published by Thomson Reuters, Managing Associate, Annabel Mackay, considers how employers' discretionary decision-making has been affected by the Supreme Court decision in Braganza v BP Shipping Ltd. The article considers the role of Braganza in the recent High Court decision in Patural v DB Services (UK) Ltd and the recent Court of Appeal decision in Hills v Niksun Inc.

The Supreme Court decision in Braganza v BP Shipping Ltd has opened up another way in which employees can challenge the exercise of an employer's discretion.

The case concerned a claim for death-in-service benefits by the wife of a ship's engineer who had disappeared during a voyage. The contract provided that death-in-service benefits would be withdrawn if the death resulted from the employee's wilful act, in the employer's opinion.

The manager who decided that the benefits should not be payable relied upon a report that had been prepared to investigate the incident for the purpose of recommending improvements to BP's systems. That report concluded that suicide was a possible reason for the disappearance but that adverse weather conditions could also have been responsible. The widow's claim for breach of contract succeeded at first instance but was reversed by the Court of Appeal. The Supreme Court allowed the appeal and reinstated the original decision that the death-in-service benefits were payable.

The Supreme Court's decision was significant because it carried public law concepts regarding the scrutiny of administrative decisions into the employment arena. It held that there is an implied term in employment contracts that a contractual discretion must be exercised lawfully and rationally "in the public law sense" and consistently with its contractual purpose.

The rational exercise of discretion involves the application of two principles: (i) the decision-maker must take into account relevant factors and ignore irrelevant factors; and (ii) the decision must not be so outrageous that no reasonable decision-maker could have come to that conclusion.

Cases concerning the exercise of an employer's discretion in respect of discretionary bonus payments have tended to focus on the outcome rather than the process, with employees arguing that the decision itself is so unreasonable that no reasonable employer could have reached it.

The full implications of the Supreme Court's decision have yet to be clarified. However, there have already been two cases in which claimants have introduced a Braganza argument when challenging their employer's decision-making regarding variable compensation.

Patural v DB Services (UK) Ltd

In Patural v DB Services (UK) Ltd a trader challenged his discretionary bonus award by comparing himself to two employees who had received higher guaranteed bonuses. The claimant's contract provided that he would be eligible for an annual discretionary incentive award to be "determined in a manner broadly consistent with that applied to [his] peers at similar levels of compensation and taking into account any other factors that the Company determines are relevant in a given year for each business."

The claimant's manager explained that a material factor in determining the level of his bonus payment was the losses that had been sustained outside the money market derivatives desks and that all members of the money market derivatives desks had been treated in a similar way, with a greater reduction being applied according to seniority.

The claimant received 1 percent of the profits that he had generated whereas the individuals on guarantees received 8 and 11 percent according to the contractual formula that applied in their case.

The High Court examined the express and implied contractual terms. The reference to a comparison with peers at a similar level of compensation did not mean that the claimant could compare himself to any peer and envisaged that some people might be on guarantees.

The employer had retained a wide contractual discretion and the claimant could not show that no rational bank would have acted in the way that it did. The two individuals were on guarantees for sound commercial purposes, one of them being of such influence that there were rumours that he had "saved the bank" in 2008.

The claim was struck out as having no reasonable prospect of success. Although the matter was raised in submissions, the claimant was not assisted by the Braganza case because it had not been pleaded. His arguments about irrationality had focused on the outcome rather than the employer's process. However, the High Court acknowledged that post-Braganza, the rationality of the employer's decision-making process and its outcome could be scrutinised.

Hills v Niksun Inc

The impact of the Braganza was also explored by the Court of Appeal in Hills v Niksun Inc, a case which concerned commission payments. Mr Hills' contract provided that he would participate in such plans as his employer "may in its absolute discretion determine" and "on such terms, and subject to such events" as the employer determined.

The commission plan reserved the employer's right to determine what level of compensation was "fair and reasonable." It also contained detailed guidance as to how commission would be split having regard to the point of influence (where major control of the account resided), the point of sale and the point of installation for the relevant deal.

The dispute concerned a client contract for the Asian and Pacific market that Mr Hills had worked on in conjunction with U.S. colleagues. The employer decided that the United States. was the relevant point of influence and awarded Mr Hills a commission payment of 48 percent.

Mr Hills claimed that he should have been entitled to 100 percent. As part of his claim, he relied upon Braganza, arguing that the decision-maker had to show that it had not reached an irrational conclusion and that all relevant and no irrelevant matters had been taken into account.

The High Court examined the contractual provisions and the nature of the deal, concluding that the UK rather than the U.S. was the point of influence. It also considered the evidence of Mr Hills' manager who explained that he had been told by his U.S. manager that Mr Hills would be "looked after". He had understood that assurance to mean that Mr Hills would receive the "lion's share" of the commission (around two thirds).

In the light of the contractual provisions, the nature of the deal and the evidence of Mr Hills' manager, the High Court concluded that his commission should be increased.

The Court of Appeal upheld that finding. It was argued on behalf of Mr Hills that post-Braganza, the employer had the burden of demonstrating that its decision was reasonable. The Court of Appeal felt that this was an over-simplification. However, it held that once Mr Hills had shown that there were grounds for concluding that his employer's decision was not reasonable, the burden shifted to the employer to prove that it was reasonable. Niksun had failed to produce evidence about how its decision had been reached and did not call the U.S. manager who had given the assurances about the level of commission Mr Hills could expect to receive.

The Court of Appeal said the absence of any evidence as to the way the decision was taken was problematic: "The judge could not decide that the decision was taken rationally unless he at least knew what was actually taken into account. Otherwise, as was suggested in argument, the commission level might have been picked by throwing darts on a dart board-or perhaps by tossing coins".

In some respects, the decision in Hills is fact-specific. At first instance the Judge noted that the contractual provisions were not like "bankers' bonus cases", where the employer reserved a "general discretion". The contract provided that the discretion had to be "fair and reasonable" and the commission plan contained detailed guidance as to how commission would be split.

Mr Hills had a reasonable expectation that he would receive the "lion's share" of the commission due to discussions that had taken place between his manager and the US manager. However, the case does show the way in which the Supreme Court's decision in Braganza adds another layer to the analysis of an employer's exercise of their discretion.

Claimants can argue that where an employer's decision-making creates an unexpected outcome, that decision must be supported by convincing evidence. The process that the employer has adopted to reach their decision as well as the decision itself will be scrutinised. We can expect more Braganza-inspired arguments to be raised in the future.

Find a Member

View or print a complete ELA member list »

Client Successes

Altra Industrial Motion Inc.

Altra Industrial Motion Inc. has multiple locations in the U.S., as well as Central America, Europe, and Asia. The Employment Law Alliance has proved to be a great asset in assisting us in dealing with employment issues and matters in such diverse venues as Mexico, Australia, and Spain. We have obtained excellent results using the ELA network for matters ranging from a multi-state review of employment policies to assisting with individual employment issues in a variety of foreign jurisdictions.

In one instance, we were faced with an employment dispute with a former associate in Mexico that had the potential for substantial economic exposure. The matter had been pending for over a year, and we were not confident in the employment advice we had been receiving. I obtained a referral to the ELA counsel in Mexico, who was able to obtain a favorable resolution of the dispute in only a few days. Based on our experiences with the ELA, we would not hesitate to use its many resources for future employment law needs.

American University in Bulgaria

In my career I have been a practicing attorney, counsel to the Governor of Maine, and CEO of a major public utility. I have worked with many lawyers in many settings. When the American University in Bulgaria needed help with employment litigation in federal court in Syracuse, New York, we turned to Pierce Atwood, the ELA member we knew and trusted in Maine, for a referral. We were extremely pleased with the responsiveness and high quality of service we received from Bond Schoeneck & King, the ELA's firm in upstate New York. I would not hesitate to recommend the ELA to any employer.

David T. Flanagan
Member of Board of Trustees 

Arcata Associates

I really enjoyed the Conducting an Effective Internal Investigation in the United States webinar.  We are in the midst of a rather delicate employee relations issue in California right now and the discussion helped me tremendously.  It also reinforced things that you tend to forget if you don't do these investigations frequently.  So, many, many thanks to the Employment Law Alliance for putting that webinar together.  It was extremely beneficial.

Lynn Clayton
Vice President, Human Resources

Barrett Business Services, Inc.

I recently participated in the ELA-sponsored webinar on the Employee Free Choice Act.  I was most impressed with that presentation.  It was extremely helpful and very worthwhile.  I have also been utilizing the ELA's online Global Employer Handbook.  This compliance tool is absolutely terrific. 

I am familiar with several other products that purport to provide up-to- date employment law information and I believe that this resource is superior to other similar compliance manuals.  I am delighted that the ELA provides this free to its members' clients.

Boyd Coffee Company

Employment Law Alliance (ELA) has provided Boyd Coffee Company with a highly valued connection to resources, important information and learning. With complex operations and employees working in approximately 20 states, we are continually striving to keep abreast of specific state laws, many of which vary from state to state. We have participated in the ELA web seminars and have found the content very useful. We appreciate the ease, cost effectiveness and quality of the content and presenters offered by these web seminars.  The Global Employer Handbook has provided our company with a very helpful overview of legal issues in the various states in which we operate, and the network of attorneys has helped us manage issues that have arisen in states other than where our Roastery and corporate headquarters are located in Portland, Oregon.

Capgemini Outsourcing Services GmbH

As an international operating outsourcing and consulting supplier Capgemini has used firms of the Employment Law Alliance in Central Europe. We were always highly satisfied with the quality of employment law advice and the responsiveness. I can really recommend the ELA lawyers.

Hirschfeld Kraemer

Stephen HirschfeldAs an employment lawyer based in San Francisco, I work closely with high tech clients with operations around the globe. Last year, one of my clients needed to implement a workforce reduction in a dozen countries simultaneously. And they gave me 48 hours to accomplish this. I don't know how I could have pulled this off without the resources of the ELA. I don't know of any single law firm that could have made this happen. My client received all of the help they needed in a timely fashion and on a cost effective basis.

Stephen J. Hirschfeld
Partner 

Hollywood Entertainment Corporation

As the Vice President for Litigation & Associate General Counsel for my company, I need to ensure that we have a team of top-notch employment lawyers in place in every jurisdiction where we do business. And I want to be confident that those lawyers know our business so they don't have to reinvent the wheel when a new legal matter arises. With more than 3400 stores and 35,000 employees operating in all 50 U.S. states and across Canada, we rely on the ELA to partner with us to help accomplish our objectives. I have been delighted with the consistent high quality of the work performed by ELA lawyers. I encourage other in-house counsel to use their services, as well.

Ingram Micro

Ingram Micro is the world's largest technology distributor, providing sales, marketing, and logistics services for the IT industry around the globe. With over 13,000 employees working throughout the U.S. and in 35 international countries, we need employment lawyers who we can count on to ensure global legal compliance. Our experience with many multi-state and multi-national law firms is that their employment law services are not always a high priority for them, and many do not have experts in many of their offices. The ELA has assembled an excellent team of highly skilled employment lawyers, wherever and whenever I need them, and they have proven to be an invaluable resource to our company.

Konami Gaming

Our company, Konami Gaming, Inc., is growing rapidly in a very diverse and highly regulated industry. We are aggressively entering new markets outside the domestic U.S., including Canada and South America. I have had the recent opportunity to utilize the services provided by the ELA. The legal advice was both responsive and professional. Most of all, the entire process was seamless since our Nevada attorney coordinated the services and legal advice requested. I look forward to working with the ELA in the future, as it serves as a great resource to the legal community.

Jennifer Martinez
Vice President, Human Resources

Nikkiso Cryo, Inc.

Until recently, I was unaware of the ELA's existence. We have subsidiaries and affiliates throughout the United States, as well as in Asia, the Middle East and Europe. When a recent legal issue arose in Texas, our long-time Nevada counsel, who is a member of the ELA, suggested that this matter be handled by his ELA colleague in Dallas. We are very pleased with the quality and timeliness of services provided by that firm, and we are excited to now have the ELA as an important asset to help us address employment law issues worldwide.

Palm, Inc.

The ELA network has been immensely important to our company in helping us address an array of human resources challenges around the world. I strongly encourage H.R. executives who have employees located in many different jurisdictions to utilize the ELA's unparalleled expertise and geographic coverage.

Stacy Murphy
Former Senior Director of Human Resources

Rich Products

As the General Counsel for a company with 6,500 employees operating across the U.S. and in eight countries, it is critical that I have top quality lawyers on the ground where we do business. The ELA is an indispensable resource. It has taken the guesswork out of finding the best employment counsel wherever we have a problem.

Jill K. Bond
Senior Vice President/General Counsel, Shared Services and Benefits

Ricoh Americas Corporation

We have direct sales and service offices all over the U.S., but have not necessarily had the need in the past for assistance with legal work in every state where we have a business presence. From time to time, we suddenly find ourselves facing a legal issue in a state where we have no outside counsel relationship. It has been a real benefit to know that the ELA has assembled such an impressive team of experts throughout the U.S. and overseas.

A few years ago, we faced a very tough discrimination lawsuit in Mississippi. We had never had to retain a lawyer there before. I was absolutely delighted with the Mississippi ELA firm. We received an excellent result. They will no doubt handle all of our employment law matters in Mississippi in the future. I have also obtained the assistance of several other ELA firms around the U.S. and have received the same outstanding service. The ELA is a tremendous resource for our company.

Roberts-Gordon LLC

Our affiliated companies have used the Employment Law Alliance in connection with numerous acquisitions, and have always been extremely pleased with our ability to obtain the highest quality legal advice on due diligence issues from jurisdiction to jurisdiction. We have found the Employment Law Alliance firms to be not only first rate with respect to their legal advice but also responsive and timely in assisting us with federal and state law issues critical to our due diligence efforts. We consider the Employment Law Alliance to be an important part of our team.

Rockwell Collins, Inc.

We have partnered with many ELA firms on the development and execution of case management strategies with very positive results. We have been very pleased with the legal advice and counsel provided by the law firms we have utilized who are affiliated with the Employment Law Alliance. The ELA firms we have worked with are customer focused, responsive, and thorough in their approach to handling labor and employment law matters.

Elizabeth Daly
Assistant General Counsel

Sanmina-SCI

Sanmina-SCI has facilities strategically located in key regions throughout the world. Our customers expect that we will provide them with the highest quality and most sophisticated services in the marketplace. We have that same expectation for the lawyers with whom we do business. With operations in 17 countries, we need to be certain that we have a team of lawyers working together to address our employment law needs worldwide. The ELA has delivered exactly what it promised-- seamless and consistent high quality services delivered in each locale around the globe. It has quickly become a key asset for our human resources department.

Starwood

We own, manage, and franchise hotels throughout the U.S. and in more than 90 countries. With more than 145,000 employees worldwide, ensuring that we comply with the complex web of local labor and employment laws in every one of these jurisdictions is a daunting task. The Employment Law Alliance has served as an important resource for us and we have benefited greatly from its expertise and long reach. When a legal dispute or issue has arisen in some far-flung place, Employment Law Alliance lawyers have always provided responsive, practical, and cost-effective assistance.

Wilmington Trust Corporation

Wilmington Trust has used the ELA to locate firms in California, Washington State, Georgia, and Europe. Our experience with the ELA lawyers with whom we have worked has always been one of complete satisfaction and prompt, practical advice.

Michael A. DiGregorio
General Counsel