Tughans Solicitors outline the steps required to vary employees' terms and conditions of employment.

The refusal of the former Royal Bank of Scotland Chief Executive, Sir Fred Goodwin, to give up his £693,000 annual pension has sparked controversy in recent weeks with former ally Gordon Brown calling on him to waive at least some of his entitlement. Whilst Mr Goodwin insists his pension pot was fairly agreed, there are claims that the RBS Board was not aware that the award was discretionary and that the majority shareholder in the bank, the Government, had not been fully appraised.

The argument has culminated in a suggestion that legislation should be introduced ensuring that the pension would be reduced and that Mr Goodwin should be forced to pursue his legal remedies through the Courts.  The full facts of the parties’ knowledge during negotiations in the midst of the bank’s demise may never become clear, but what is certain is that the matter combines a complicated mix of pensions, employment and contract law.

The legal issues raised in the Goodwin scenario are equally applicable where an employer attempts to recover a bonus payment previously agreed or paid to an employee. This could happen where an employer discovers that, having agreed or paid a bonus that the information upon which the bonus payment was based was incorrect, negligent or even fraudulent and that performance has been worse than stated.

Can an employer refuse to pay a bonus?

The first step is to identify the bonus terms which have been expressly agreed (whether contained within a written contract of employment, written bonus scheme or otherwise), and those which may be implied (for example, by custom and practice)

Once the bonus terms have been identified the employer can begin to assess the options available.

If the bonus is yet to be agreed, a carefully drafted clause within the contractual documentation which stipulates that payment of all or any of the bonus will ultimately be at the employer’s discretion, may provide an employer with room to avoid making a payment.

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 it is a bonus structure or figure which the employer proposes changing.

A specific flexibility clause may provide an employer with a route through which change can be achieved, provided the clause is unambiguous, authorises the desired change and is applied reasonably.

However, even if the specific flexibility clause is unambiguous, this does not necessarily give an employer carte blanche to impose change.  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 the effect of the proposed course of action. The non-payment of a bonus is likely to directly affect how much money an employee earns in a particular period and is therefore likely to amount to a fundamental and detrimental change to the employee’s terms and conditions of employment. An employee who believes that the relationship of trust and confidence has been breached may resign and claim constructive dismissal.

Consequently, whilst an employer may be entitled to rely upon a flexibility clause or exercise his discretion, he cannot exercise such power irrationally or perversely.  The courts have held that the non-payment of a discretionary bonus can amount to a breach of contract.

Can the employer refuse to pay an agreed bonus?

Again the first step is to identify the contractual terms.

If the bonus was awarded on the basis of financial performance which is subsequently found to be inaccurate or fraudulent, it is likely that the employer will refuse to pay. The employee may sue for breach of contract and/or unlawful deduction from wages. An employer would seek to defend any such proceedings on the grounds that whilst the bonus was agreed, it was based on a misrepresentation by the employee.

Can an employer recover a bonus that has already been paid?

Once a bonus is agreed or paid, the employer should look to the terms of the contractual documentation to check whether the provisions provide for non-payment or claw back.

An agreement to repay is most likely to be linked to the employee’s breach of the terms of the bonus structure; for example, where it subsequently becomes apparent that the employee has substantially underperformed where a bonus is performance related.

This will however necessitate proving the breach and underperformance.  In some cases the employee’s failures may be succinct however, the matter is at risk of becoming protracted if the employee attempts to apportion blame to other members of the organisation or factors outside his control.

It is always open for an employer to dismiss an employee who is guilty of misconduct, however, in the absence of an enforceable contractual claw back provision, this will not assist the employer in recovering the bonus which has already been paid or agreed. In Sir Fred’s case though it has been suggested that dismissing him with payment in lieu of notice would have saved RBS half of the pension fund which he is now contractually entitled to under the terms of his early retirement.