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Coronavirus – Can Employers be obliged to alter contractual remuneration arrangements?

Sam Woods, Deputy Governor of the Bank of England and CEO of the Prudential Regulation Authority, recently wrote to banks stating that the PRA expects banks not to pay any cash bonuses to senior staff and to take appropriate further action with regard to the accrual, payment and vesting of variable remuneration over the coming months.

This raises questions regarding whether employers can be obliged to, or have the right to, alter contractual remuneration arrangements, and to exercise their discretion in a particular way.

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Published 7 April 2020

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Bankers’ bonuses are currently subject to a bonus cap introduced by EU regulations which aim to limit bonus pay-outs to 100% of salary, or 200% with approval from shareholders.

In the UK, regulated firms must also comply with the Remuneration Code. The code applies (in different ways) to all banks, building societies and investments firms within the scope of the EU Capital Adequacy Directive. Those in senior management positions and ‘material risk takers’ are caught by the code’s restrictions. Dispensation from the code’s full rigour can be sought by businesses deemed to be less risky (eg investment management).

The remuneration code stipulates that at least 40% of a bonus must be deferred over three years for all applicable staff. At least 60% must be deferred for the most senior management or when an individual’s bonus is greater than £500,000.

Furthermore, at least 50% of any bonus must be made in shares, share-linked instruments or other non-cash instruments. Any such shares must have an appropriate retention period. The code also stipulates that guaranteed bonuses of greater than one year cannot be awarded.

The simplest way that a change can be made to any contractual remuneration rights is through the express agreement of all parties. This appears to have been the case in respect of the PRA’s recent letter to banks.

There is no legislation obliging banks to comply with the PRA’s request and so, unlike the statutory bankers’ bonus cap, there would be no obligation for employers to comply with this request. It remains unclear whether any such legislation would be introduced as part of the Government’s wider package of measures to deal with the Covid-19 pandemic.

It is also common for bonus payments to be made at the employer’s discretion.

Employers’ discretion has been limited by recent case law. Employers have a duty to exercise such discretion honestly and in good faith, not in an arbitrary, capricious or irrational way and employers have  duty to maintain trust and confidence.

Even if a bonus scheme is stated to be discretionary, an employee could argue that they have an implied contractual right to a bonus in light of custom and practice. For example, if the employer has paid a ‘discretionary’ bonus in a particular manner for a number of years previously. An employer may also not be entitled to withdraw a discretionary bonus scheme without giving notice.

The duty of trust and confidence will also usually require employers to give reasons for the exercise of their discretion to pay or withhold a bonus.

Therefore an employer would not be able to unilaterally alter contractual remuneration arrangements in the absence of a statutory or regulatory obligation. The simplest way for an amendment to occur would be for the employee to expressly agree to such a change.

If a bonus payment is discretionary, then an employer may be able to withhold payment of a bonus but they would have to act with good faith and provide reasons for their decision not to grant a bonus payment.

If you have any questions on this topic or any other, please contact our free 30 minute Coronavirus Employment Advice Helpline and we can help you to consider the options available to you and your business.

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Shorter Reads

Coronavirus – Can Employers be obliged to alter contractual remuneration arrangements?

Sam Woods, Deputy Governor of the Bank of England and CEO of the Prudential Regulation Authority, recently wrote to banks stating that the PRA expects banks not to pay any cash bonuses to senior staff and to take appropriate further action with regard to the accrual, payment and vesting of variable remuneration over the coming months.

This raises questions regarding whether employers can be obliged to, or have the right to, alter contractual remuneration arrangements, and to exercise their discretion in a particular way.

Published 7 April 2020

Associated sectors / services

Authors

Bankers’ bonuses are currently subject to a bonus cap introduced by EU regulations which aim to limit bonus pay-outs to 100% of salary, or 200% with approval from shareholders.

In the UK, regulated firms must also comply with the Remuneration Code. The code applies (in different ways) to all banks, building societies and investments firms within the scope of the EU Capital Adequacy Directive. Those in senior management positions and ‘material risk takers’ are caught by the code’s restrictions. Dispensation from the code’s full rigour can be sought by businesses deemed to be less risky (eg investment management).

The remuneration code stipulates that at least 40% of a bonus must be deferred over three years for all applicable staff. At least 60% must be deferred for the most senior management or when an individual’s bonus is greater than £500,000.

Furthermore, at least 50% of any bonus must be made in shares, share-linked instruments or other non-cash instruments. Any such shares must have an appropriate retention period. The code also stipulates that guaranteed bonuses of greater than one year cannot be awarded.

The simplest way that a change can be made to any contractual remuneration rights is through the express agreement of all parties. This appears to have been the case in respect of the PRA’s recent letter to banks.

There is no legislation obliging banks to comply with the PRA’s request and so, unlike the statutory bankers’ bonus cap, there would be no obligation for employers to comply with this request. It remains unclear whether any such legislation would be introduced as part of the Government’s wider package of measures to deal with the Covid-19 pandemic.

It is also common for bonus payments to be made at the employer’s discretion.

Employers’ discretion has been limited by recent case law. Employers have a duty to exercise such discretion honestly and in good faith, not in an arbitrary, capricious or irrational way and employers have  duty to maintain trust and confidence.

Even if a bonus scheme is stated to be discretionary, an employee could argue that they have an implied contractual right to a bonus in light of custom and practice. For example, if the employer has paid a ‘discretionary’ bonus in a particular manner for a number of years previously. An employer may also not be entitled to withdraw a discretionary bonus scheme without giving notice.

The duty of trust and confidence will also usually require employers to give reasons for the exercise of their discretion to pay or withhold a bonus.

Therefore an employer would not be able to unilaterally alter contractual remuneration arrangements in the absence of a statutory or regulatory obligation. The simplest way for an amendment to occur would be for the employee to expressly agree to such a change.

If a bonus payment is discretionary, then an employer may be able to withhold payment of a bonus but they would have to act with good faith and provide reasons for their decision not to grant a bonus payment.

If you have any questions on this topic or any other, please contact our free 30 minute Coronavirus Employment Advice Helpline and we can help you to consider the options available to you and your business.

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