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Bonus Lawfully Denied to Banker under Shadow of Fraud Investigation

Many employment contracts, particularly in the financial services sector, incorporate entitlements to bonuses or share options. However, as a High Court case showed, employers usually retain a wide discretion whether or not to actually award them and they can be withheld on reasonable grounds.

The case concerned a former bank employee who was the global head of a division that had come under criminal and regulatory investigation in connection with, amongst other things, alleged assistance provided to US citizens in evading tax. A former client of the department had admitted conspiracy to defraud the US Internal Revenue Service and the employee had been referred to as an unindicted co-conspirator in those proceedings.

Following an internal investigation, the bank’s remuneration committee decided not to award the employee bonuses and share options that would otherwise have been due to him under his contract. The employee responded by launching a breach of contract claim on the basis that he had not been found guilty of any wrongdoing and that the committee’s decision was arbitrary, perverse and capricious.

In granting the bank summary judgment on the employee’s claim, however, the Court noted that his contract stated in clear and unambiguous terms that the bank enjoyed an absolute discretion whether or not to award the bonuses or share options.

The breadth of that discretion was reiterated in a settlement agreement that was signed on his departure from the bank, and he had no realistic prospect of showing that it had been exercised in bad faith. The bank had in any event carried out a bona fide investigation and the committee’s decision was justified by the employee’s persistent failure to respond to the allegations made against him.

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