Senior executives and directors: bonuses and restrictive covenants

I didn’t get my bonus, can I sue my employer?

Many senior executives and directors receive much of their remuneration in the form of bonuses and incentives. Sometimes this pay will be awarded on a fixed, contractual basis and will be liked to sales, profits or turnover.

However, often bonuses will be expressed to be “non contractual” or “discretionary”. This will mean that the employer apparently has a choice about whether to pay them or not. Often very clear wording is used in contracts to express that the choice is all the employer’s (“a non-contractual bonus to be awarded in the employer’s strict discretion”).

The starting point for considering whether a bonus is payable or not is the contract of employment. If the contract links the payment of the bonuses to certain conditions occurring, and those conditions occur, then if the employer refuses to pay it will be in breach of contract and a claim can be made by the employee.

If the bonus is non contractual or discretionary, then the question becomes whether the employer exercised their discretion in a rational way. An employer will not be entitled to exercise its discretion in a capricious or discriminatory and will need to show the reasons for their decisions.

Factors to consider include:

• Was there a legitimate expectation that the bonus scheme will operate in a certain way, ie targets that have been given and delivered on?
• Has the employer got a good reason that makes logical sense for its decision?
• Has the employer taken into account relevant factors in coming to its decision?
• Is there evidence that the decision is discriminatory, such as favouring older or male workers more than others?

What types of post termination restrictions are legitimate?

Many senior executives and directors have restrictive covenants in their contracts. Broadly, these are terms which purport to limit the types of activity individuals can do when they cease working for their employer.

It is common during employment relationships to acquire sensitive confidential information about your employer’s business. Whilst it is legitimate for businesses to take steps to protect their confidential information by using restrictive covenants, it is not normally legitimate to use restrictive covenants to merely shield a business from competition.

Post termination restrictions which may be lawful include terms preventing you:

• Using information you have gained during your former employment to benefit yourself or a new employer;
• Approaching your former employer’s clients and customers and trying to win their business for your new employer;
• ‘Poaching’ other employees who still work for your former employer.

Further, in some narrow circumstances, it may be lawful for a post termination restriction to prevent you from competing with your former employer by working for one of their competitors or setting up your own business in competition with them.

Is the restrictive covenant in my contract enforceable?

Restrictive covenants will only be enforceable if they are no wider than necessary to protect an employer’s legitimate business interests. So, if a restrictive covenant is unduly broad, or prevents you from earning a living in an unreasonable way, they will not be enforceable. The following is a list of some factors to take into account in deciding whether a restrictive covenant is able to be enforced.

The more answers to the following that are positive, the more likely it is the restrictive covenant will be enforceable:

• Does the restrictive covenant only cover a limited geographic area?
• Does the restrictive covenant only cover specific, and limited, type of business activity?
• Was the role that you performed for your old employer very senior, giving you access to trade secrets?
• Is the restriction limited to preventing you from contacting the old clients/customers that you dealt with whilst working for your former employer?
• Is the restriction limited to preventing you from contacting colleagues who worked for your former employer and trying to recruit them?
• Can it be said that the restriction is necessary to protect a legitimate business interest that your employer has?
• Does your contract provide for a period of garden leave, where you are paid during the period of your restrictive covenant?

If the restrictive covenant is so wide that it prevents you from using your expertise and skills in the field in which you have specialised for a long period with no compensation, it may well be unenforceable.

The burden is on the employer to show that the restrictive covenant is reasonable. They will need to demonstrate that it goes no further than is necessary and reasonable to protect their legitimate interests.

What might happen if I breach a post termination restriction?

If you breach a restrictive covenant, your former employer might seek an injunction from the High Court to enforce the contractual restriction. Your employer may also seek to bring a damages claim against you for the losses caused. However, it will be up to them to prove that any losses they incurred were down to your actions. For example, if you breach a restriction that prevents you from ‘poaching’ former colleagues, your employer might try to recover the costs of recruiting to replace them.

What if my employer breached my contract?

If your employer is in repudiatory breach of contract (IE they have committed a particularly serious breach that goes to the heart of the contract), then you may be released from the restrictive covenant under the principle in General Billposting v Atkinson [1909] AC 118.