Can an employee challenge an employer’s view of his performance?
A recent High Court case reinforces the employer’s hand in determining performance-related bonuses. It confirms that employees will struggle to get a Court to overturn an employer’s decision unless it is irrational or perverse, which will in many cases be a high hurdle to overcome.
In this case (Humphreys v Norilsk Nickel International (UK) Ltd), Dr Humphreys was employed as a chief economist of a precious metal mining company. The amount of his annual bonus was determined by his employer’s assessment of his performance on a sliding scale of 1 (unsatisfactory), which meant no bonus was payable, to (6 “superior or exceeding expectation on 100% of agreed objectives”), which meant the maximum amount of bonus became payable. Dr Humphreys’ objectives were summarised at the end of his contract, though the list was not expressed to be exclusive, nor were any objectives given a numerical weighting.
Dr Humphreys’ forecasts for nickel prices (part of his duties) were more than 50% off actual prices in the last quarter of 2008. These contributed to business decisions being taken (or not being taken) causing the business substantial losses. On this basis, Dr Humphreys’ performance was assessed by his employer at grade 1 for the relevant year, which meant no bonus was payable.
Dr Humphreys challenged the decision arguing his performance had been satisfactory in the circumstances (which would have meant he achieved a higher grade earning him a bonus), listing the work he had done in the year and the praise he had received. He also said it was not his fault that the global economic crisis led to his forecasts becoming inaccurate. He further asserted that other leading economists in the precious metals industry had also provided forecasts which proved similarly inaccurate, which should be relevant in providing a benchmark for his performance.
The High Court rejected Dr Humphreys’ claim. Taking into consideration his employer’s financial position, his inaccurate forecasts which had contributed to that and the objectives he had been set, the employer’s assessment of his performance and its consequent decision not to pay a bonus was in accordance with the express terms of the contract and perfectly rational. For Dr Humphreys’ claim to succeed, the employer’s decision needed to be irrational or perverse. Whether his overall performance or performance in other areas had been objectively sufficient to justify payment of a bonus was not the relevant question. The employer’s decision would not be disturbed so long as it was taken in accordance with the provisions of the contract and was not perverse or irrational.
The decision in this case is not really surprising. A good economist would have earned plaudits by predicting the collapse in prices. However, the case is a good illustration of the tension between valuing “inputs” (the amount of effort etc which an employee puts into his job, which is what Dr Humphreys tried to emphasise and seek reward for) and “outputs” (the impact of contributions). A wise employer makes sure that it can take both into account and allow one to outweigh the other.
The case is also relevant for companies with share plans where there is a specified target (say total shareholder return) but the Remuneration Committee also has the discretion not to allow receipt of shares unless there is “underlying financial performance”. This case would appear to support an employer’s use of that discretion to reduce an employee’s receipt without too much justification.
This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com