Many recruitment businesses fondly believe that as long as payment of bonuses are 'discretionary', there can be no come back if they fail to pay them. The issue is particularly relevant where consultants get contractual commission based on their team’s performance but expect a ‘discretionary’ bonus to recognise exceptional individual performance. The assumption used to be that if a consultant walks for any reason, she / he had little chance of claiming the right to a discretionary bonus.

However this assumption has been turned on its head following a recent Court of Appeal decision. In Horkulak v Cantor Fitzgerald, Steven Horkulak’s contract of employment stated that he was entitled to a bonus at the sole discretion of the company and that furthermore he still had to be working for the company when bonuses were declared in order to get one.

He resigned and sued for wrongful dismissal (breach of contract) claiming that the CEO’s foul and abusive language amounted to a breach of the implied contractual term of trust and confidence. He claimed that his boss had, rather colourfully, threatened to "break him into two" and "rip (his) head off". The company responded arguing that that the bad language was prompted by Steven Horkulak’s poor attendance & performance and hit back raising his alleged heavy drinking and cocaine habit.

The company claimed that swearing and bad language was standard in their particular workplace. However that argument fell on stony ground. The frequent use of foul and abusive language did not sanitise its effect said the original deciding judge in July 2003, and was a hallmark of the CEO’s dictatorial style of management. Mr Horkulak was entitled to proper treatment in accordance with his contract. He was awarded substantial damages, including an award for the discretionary bonus that he would have received had he not been forced to resign.

The Court of Appeal took the view that a discretionary clause in a permanent employment contract should be exercised in good faith, genuinely and rationally when awarding or withholding a benefit. This evidently had not been the case for Mr Horkulak. Where an employer fails to do so, the employee is entitled to be compensated for that failure.

The case is important in several respects. Managers who use foul and abusive language to staff do so at their own peril. The argument that ‘we all swear in this office’ is unlikely to cut much ice in Court.

More importantly, the case may prompt legal challenges from consultants who see other colleagues getting much bigger bonuses for no good reason. The culture of secrecy in many businesses is often quite unjustifiable.

Recruitment businesses would be wise to ensure that they have transparent and objectively verifiable means of calculating bonuses and should review their policy for payment of discretionary bonuses and contract terms extremely carefully.

This article is based on UK law, is for general guidance only and should not be relied upon without specific legal advice.
Further information
For further information please contact Caroline Walker, head of the Employment Department at Sprecher Grier Halberstam LLP, Solicitors.

Caroline Walker 020 7544 5625 carolinew@sghlaw.com