Clawing back bonuses – is it legal?

The issue of bonuses, particularly bankers’ bonuses is still dominating the headlines. In February, it emerged that Lloyds Banking Group planned to strip a number of top executives of about £2 million in bonuses as a penalty for a financial scandal that cost the taxpayer-backed bank £3.2 billion last year.

It is important to stress that this unprecedented attempt to claw back bonus payments is not a universal remedy. In this case, because it is a consequence of the adjustment of the bonus pot caused by the PPI scandal, it is provided for in Lloyd’s contractual arrangement.

Many opinions have been voiced suggesting that bonuses should be cut or withdrawn. However in the real world, whether or not politicians or the general public like it, the status of a bonus is a legal matter – does the contract allow it or not?

If employers want the option of being able to withdraw, or not to pay, a bonus, they must put in place a tightly-drafted contractual definition. Some companies may try to allow for flexibility by describing bonuses as ‘discretionary’ but simply attaching this label is no guarantee that payment is, indeed discretionary. If such a clause goes on to detail how the employee would qualify for a bonus or the employee has always received a bonus, then very often it may not be ‘discretionary’ at all.

A well-drafted contract could save money, embarrassment and the risk of litigation in the event a company wants to say ‘no’ to a bonus on the grounds that it is not warranted.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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