United Kingdom Employment Appeal Tribunal

APPEARANCES

 

For the Appellant	MR JULIAN MILFORD (of Counsel) Instructed by: Messrs Hart Brown Solicitors 20 Bedford Road Guildford Surrey GU1 4TH
For the Respondent	NO APPEARANCE OR REPRESENTATION BY OR ON BEHALF OF THE RESPONDENT


 


HIS HONOUR JUDGE PETER CLARK

1. This is an employer's appeal brought by Diagonal Computer Services Ltd, the Respondent before an Employment Tribunal sitting at London (South) on 20 December 2001 under the chairmanship of Mrs Gleeson, with the permission of a division presided over by HHJ Serota QC at a Preliminary Hearing held on 12 August 2002, against that Employment Tribunal's decision, promulgated with Extended Reasons on 27 February 2002, upholding the Applicant Mrs Plews' complaint of unlawful deductions from her wages. The Employment Tribunal awarded the Applicant the sum of £1,764.02 in respect of that deduction.
2. The circumstances giving rise to the claim may be shortly stated. The Applicant commenced employment with the Respondent as a SAP Application Consultant on 4 January 1999. On 10 July 2001 she gave 1 month's notice of resignation from the employment. That notice was accepted; she worked it out and left on 10 August 2001. She attained other employment through an agency with a company which happened to be a client of the Respondent.
3. As part of her terms and conditions of employment with the Respondent the Applicant received a quarterly bonus. The next quarter day for that purpose following her resignation fell on 30 September 2001. She wrote to the Respondent's Resource Director, Mr Ingram, in October requesting payment of the September bonus, but no bonus was paid. In a letter dated 29 October Mr Ingram told the Applicant:

"The management of SAP Consultancy Division took into consideration a number of factors in deciding whether to exercise this discretion [to pay a bonus falling due following termination of employment] in your case, in particular, but without limitation, to the training costs incurred by the company in relation to your employment and subsequent costs."

4. The relevant contractual provision in the bonus scheme read, so far as is material, as follows:

"What happens to my bonus if I leave the Company?

Payment of outstanding bonus is at the discretion of the management of SAP Consultancy Division.

No outstanding bonus will normally be paid if any of the following apply…"

5. There then followed five circumstances in which payment would not normally be made. The relevant provision for our purposes is this:

"Consultant resignation causes Diagonal to incur consequential losses."

6. It was common ground that if the Applicant was entitled to the September bonus it was quantified at the amount eventually awarded by the Employment Tribunal.
7. Historically, discretionary bonuses could not be recovered by way of damages at Common Law. See Lavarack v Woods [1967] 1 QB 278 (CA). However, the modern approach has relaxed the old rule. We consider that the present position is best stated by Burton J in Clark v Nomura International Plc [2000] IRLR 766. A discretionary bonus is recoverable by way of a claim for damages for breach of contract where no reasonable employer would have exercised his discretion in favour of withholding the bonus. We think that approach, based on the perversity test, is to be preferred to that of 'capriciousness' formulated by Timothy Walker J in Clark v BET Plc [1997] IRLR 348.
8. We also consider that the perversity test fits with the approach of Wood P in Kent Management Services Ltd v Butterfield [1992] ICR 272, a case concerned with a "Wages Act" claim as is the present case. See now section 13 of the Employment Rights Act 1996.
9. In Kent Wood P stated that where a discretionary non-contractual payment would normally be expected by the employee, withholding of that payment by the employer represented an unlawful deduction from wages.
10. Thus, in the present case, it seems to us that if the management of SAP Consultancy Division exercised its discretion to withhold a payment of bonus which would not normally be paid, according to the bonus scheme provision referred to above, then:

(a) Such exercise of discretion could not be said to be perverse, in the Nomura sense; and

(b) The Applicant could not normally expect such payment in accordance with the principle in Kent.

11. The Employment Tribunal's reasoning in upholding the Applicant's complaint appears to have been as follows:

(i) Mr Ingram decided to withhold the September bonus without consulting the board of the Respondent, Diagonal. Having made that decision personally he then had it approved after the Applicant's exit interview but before 30 September, in private discussions with the Consultancy Director and the Managing Director (Reasons paragraph 8).

(ii) None of the circumstances in which bonus would not normally be paid under the bonus scheme applied. As to the relevant provision, that is consultant resignation causing Diagonal to incur consequential losses, the Tribunal held as follows:

(a) as to Mr Ingram's evidence that the Respondent had spent £4,450 in recruitment and finders fees to replace the Applicant (including a bounty paid to another member of staff on a discretionary basis for recommending her replacement, which replacement was paid £50,000 per annum, compared with the Applicant's £35,000 per annum salary;

(b) at the date of termination of the Applicant's employment, 10 July, there was no client work for which she was responsible. Although her replacement had a CRM certificate, as had the Applicant, the Respondent did not obtain a new CRM contract until November 2001.

There were salary savings in respect of the Applicant in the summer and early autumn of 2001. Further, the bounty paid to the member of staff was discretionary and the commission paid to the employment agency arose from the terms of the agency contract, the agency not having found the replacement, that having been done by the member of staff who made the recommendation. In these circumstances, held the Tribunal, the Respondent suffered no consequential loss (Reasons paragraphs 9-10).

(iii) Applying section 13 of the Employment Rights Act 1996, the decision to refuse bonus was not made by the management of SAP Consultancy Division but by Mr Ingram. None of the 5 circumstances listed in the bonus scheme in which bonus would not normally be paid arose (Reasons paragraph 13); the only circumstances of which the Applicant had written notice in which it would not be paid did not apply; the Respondent had made out no convincing case for withholding bonus, except simply that the Applicant had left (Reasons paragraph 15). Therefore the complaint succeeded.

12. Mrs Plews has indicated that she does not intend to lodge a Skeleton Argument; she is content to rely on the reasons given by the Employment Tribunal and additional grounds supporting the Tribunal's decision contained in her Answer dated 7 October 2002. She has not appeared nor is she represented today. We have taken into account what is said in the Answer.
13. In support of the appeal Mr Milford takes three points:

(i) The Employment Tribunal was wrong to find that the decision to withhold the September bonus was not taken by the management of SAP Consultancy Division. Insofar as the Employment Tribunal found that the decision to pay the bonus had to be taken by the Board of Diagonal, that was an error of law. Mrs Plews submits that the Tribunal made no such finding. We think that they did, reading paragraphs 6, 8 and 13 of their Reasons together. At paragraph 6 they find that Mr Ingram made the decision to withhold bonus without consulting the Board of Diagonal. At paragraph 8 they find: "The phrase 'the management of the SAP Consultancy Division' meant the Board."

We cannot agree with that finding. The two are not synonymous. On the contrary, as Mr Milford submits, the management of the Consultancy Division means those employed to manage that division of the Company; not the Board of Directors, charge with the management of the Company itself. So defined, it is clear to us that a decision by the Resource Director, affirmed by the Consultancy Director and the Managing Director is a discretion exercised by the management of the Consultancy Division. To find otherwise is in our judgment a perverse conclusion.

(ii) It is submitted that the Employment Tribunal implicitly found that the five circumstances in which bonus would not normally be paid was an exhaustive list. If none of those circumstances arose then a bonus would normally be paid. That is a misconstruction of the bonus scheme.

For the reasons which follow we do not find it necessary to rule on this second ground of appeal.

(iii) The Employment Tribunal was wrong to find that the Applicant's resignation caused no consequential loss to the Respondent. We accept, by analogy with the concept of consequential loss in a breach of contract case, that consequential loss caused by the Applicant's resignation includes loss of profit and expenses. Those expenses, in the case of an employee leaving in breach of contract, include the additional costs of a replacement.

14. Mr Milford submits that, before the Employment Tribunal, the Respondent established three heads of consequential loss. It is necessary, for present purposes only for him to establish that the Tribunal was wrong in law in concluding that not one of the those heads of consequential loss was made out.
15. In these circumstances the argument before us has focused on the Employment Tribunal's finding at paragraph 10 of their reasons where they say this:

10 "In response to questions from the Tribunal, Mr Ingram said that the employment agency were entitled to invoice 5% of the replacement's salary, even though he had not actually been found by them but recommended by a member of staff. That part of the loss is not consequential on the Applicant's resignation but arises from the terms of contract between the Respondent and its employment agency."

16. Mr Milford submits that that reasoning reveals a patent error of law. The fact that the Respondent was contractually obliged to pay commission to the employment agency does not prevent that expense, arising directly from the need to replace the resigning employee, from amounting to consequential loss within the relevant provision of the bonus scheme.
17. We accept that submission. The finding by the Tribunal is plainly wrong, to borrow one of the epithets collected by Mummery P in Stewart v Cleveland Guest Engineering Limited [1994] IRLR 440, 443 in the formulation of the perversity test on appeal to the Employment Appeal Tribunal. No additional grounds in support of that finding are advanced by Mrs Plews in her Answer.
18. In these circumstances we find ourselves in this position. The Tribunal made two material findings which can only be characterised as perverse in the legal sense:

(i) that a discretion granted to the management of the SAP Consultancy Division could only be exercised by the Board of Directors of the Respondent Company itself; and

(ii) that the payment of commission to an employment agency arising from the hire of a replacement for the Applicant following her resignation did not amount to consequential loss caused by the resignation because it arose from the terms of the contract between the Respondent and the agency.

19. It follows that the Tribunal's conclusion that there was here an unlawful deduction from wages cannot stand. The Respondent acted in accordance with the terms of the bonus scheme in withholding bonus which the employee would normally expect to be withheld on the wording of the contractual scheme. In these circumstances the Respondent cannot be said to have acted perversely, see Nomura, nor could the Applicant be said to have a reasonable expectation that the bonus would be paid in these circumstances. On the contrary, cf. Kent v Butterfield.
20. In reaching this conclusion we take into account the extent of the consequential loss to the Respondent, that is 5% commission to the employment agency on the replacement's salary of £50,000; £2,500. In these circumstances any possible argument that the Respondent exercised their discretion perversely on the basis that the loss was disproportionate to the size of the bonus does not arise in this case.
21. Accordingly the appeal is allowed. The Tribunal decision is set aside. The Applicant's complaint of unlawful deduction from wages is dismissed.
22. However, before leaving this case, the lay members, Mr Lambert and Professor Wickens, note that 'there are numerous cases of denial of bonus'. The lay members hope that the employer does not use the wording "causes Diagonal to incur consequential losses" to stretch the definition to such an extent that "denial of bonus" is the norm rather than the exception.