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Issue 97 (February 2005)

Contents

In the news
Time out
Counting the costs
Hollow victory for claimants
Own up, own up
Human rights and wrongs
Roll up, roll up
Discrete payment

Discrete payment

When a court decides that someone has been wrongfully dismissed, it can calculate the size of any contractual bonus to which the employee would have been entitled as part of the damages settlement.

It is not so clear, however, what happens when the bonus is discretionary. In Horkulak v Cantor Fitzgerald International (CFI) (2004, IRLR 942), the Court of Appeal decided that the employer still has to exercise his or her discretion rationally and in good faith.

What were the basic facts?

In August 1999, Mr Horkulak was promoted to a senior post with CFI on a three-year contract, which entitled him to a basic salary, a loyalty bonus and an annual discretionary bonus. He reported to the chief executive, Mr Amaitis.

In June 2000 he resigned saying that his life had been made intolerable by the bullying and abusive behaviour of the CEO. He claimed wrongful and constructive dismissal.

The company admitted the abusive behaviour, but said it was largely down to serious shortcomings in Mr Horkulak's performance, made worse by his addiction to alcohol and cocaine.

The High Court judge rejected the company's defence, saying that Mr Horkulak's abuse of both alcohol and cocaine had not make him unfit to do his job. Instead he said that Mr Amaitis had deliberately undermined Mr Horkulak and thereby breached the implied term of trust and confidence in his contract.

The judge assessed damages on the basis of the amount he would have received up to 30 September 2002, had he not been dismissed. That included the two discretionary bonuses for 2001 and 2002, calculated at £630,000. The total award came to almost £900,000.

What was the main ground for appeal?

CFI appealed against both the award and the level of damages, saying that as the company was not under an obligation to pay the bonus, and as damages for wrongful dismissal have to relate to a contractual entitlement, the judge was wrong to have awarded them.

It said that the wording in the contract was clear - by using the word 'may' with regard to the discretionary bonus, the company was under no obligation to even consider paying it.

What did the Court of Appeal decide?

The Court of Appeal disagreed with the company. It said that the judge was right that had Mr Horkulak remained with CFI, it would have had to engage in a rational exercise of the discretion as to whether or not to pay him a bonus.

It went on to say that, in this case, it was clear from the wording of the clause that it was intended to motivate and reward employees, and should be read as a contractual benefit 'as opposed to a mere declaration of the employer's right to pay a bonus if he so wishes.'

The next thing to decide was how much the award should be. This, said the court, required the judge to 'put himself in the shoes of those making the decision, and consider what decision, acting rationally, and not arbitrarily or perversely, they would have reached as to the amount to be paid', had he remained in CFI's employment.

Again, it found against the company saying that in comparison with the sums paid to others of similar status, the figures arrived at by the judge were not out of line with Mr Horkulak's reasonable expectations, had the company been acting reasonably.

It did accept the company's argument, however, that the judge had failed to explain in sufficient detail how he had arrived at the precise figures and that Mr Horkulak had not done enough to mitigate his losses. It therefore reduced the award of damages by just over £100,000.