150 150 Eska Hartdegen

A bird in the hand is worth two in the bush

I wish to pose a question. What should an employee do, who is entitled to a substantial annual bonus calculated on the gross sales of their employer’s company, the bonus is paid to them monthly, and the employer simply at some moment stops paying the bonus?

This was the circumstance that arose in the case of Thompson v 88 C-Force Textile Industries Limited. An employee since 1999 and promoted to the position of General Manager (GM) in 2001, the parties negotiated an agreement in 2005 that the GM would be paid a higher percentage annual bonus on the annual turnover he personally was responsible for, where the turnover was in excess of $2 million.

In mid-2008, the employer attempted to reduce the bonus payable. After failed negotiations to reach an agreement, the employer simply stopped paying the bonus. Instead of taking any steps in response to this action to recover the bonus, the employee continued to work on as GM, regardless.

In late October 2011, the GM’s role was declared redundant. At that point a claim was filed under section 131(a) of the Employment Relations Act 2000 for recovery and reimbursement of the arrears of the bonus sum of $201,751.39, plus holiday pay of 8%, plus interest on those two sums.

The GM’s explanation in the Employment Relations Authority (ERA) for doing nothing to recover his bonus payments for the three years was that he was concerned at the time about losing his job, and that he viewed his unpaid bonus “as a nest egg” which was accruing to him throughout his employment.

In response to the claim, the company lodged a counterclaim against the ex-GM claiming that he had been overpaid bonuses of $266,000 between 2005 and 2008. The counterclaim was dismissed, with the Authority Member saying that the company “wrongly calculated his bonus entitlement based on total company sales instead of his personal sales only”.

The company’s argument that by failing to bring the matter up, the ex GM had accepted the change to his bonus payments was rejected by the Authority. Instead, the Authority Member held that it was the GM’s right to decide at what point he wished to make the claim for arrears bonus.

Although the company was ordered to pay $185,144.72 in arrears bonus, the Authority Member awarded no interest in respect of the bonus nor his holiday pay entitlements. Thus the GM forfeited at least his holiday pay on the sum, which arguably he would have accrued had the bonus been paid all along.

Most importantly and fortunately for the GM, his employment contract had been drafted by his own lawyer, and not by the company’s lawyer. Because the GM had a signed employment agreement which contained a clause providing for the bonus and which set out its method of calculation, the GM’s claim succeeded. The company could only challenge the meaning and interpretation of the clause, not the fact that the GM was entitled to a bonus. Nor could the employer alter the bonus entitlement.

A well-drafted employment agreement and bonus provision affords certainty and will result in a successful outcome. There always will be risk attached to not claiming what is due, when it is due. Where a dispute arises, as it did in this case, the litigation costs involved are a resulting expense for both parties, however, both employees and employers stand to benefit from seeking advice while contract terms are negotiated and before contracts are finally signed.