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You're fired!

Thu 19 Jun 2008

In the early 1990s it was a recession, in 2001/2002 a downturn and in 2007/2008 a credit crunch.  Different names and conditions but, from an employment lawyer’s perspective it means the same thing – redundancies, redundancies and more redundancies.

This time it started when the US sub-prime mortgage market collapsed in the summer of 2007. By June 2008 we now have, in my view, the worst economic conditions and outlook since the early nineties. We have the return of negative equity, overall employment in the UK will fall for the first time since 1992, house prices are likely to fall by around 8% and the average city bonus (for those who actually keep their jobs) is likely to reduce by 40%.

It isn’t looking good, and it will get a lot worse.

From an employment perspective, the first in line to be affected by negative economic conditions are those closest to the money – the banks – and the outlook for employees in the banking sector is truly grim. It is estimated by some that, excluding those already axed, at least 20,000 city jobs will disappear in the next twelve months. J P Morgan estimates 40,000 jobs in London alone.

And they’ve already started – banks don’t waste time when money is being lost – December 2007 and January 2008 saw investment banks start to offload employees, both senior and junior. Redundancies at investment banks are not pretty or subtle. Organisations devoted solely to the art of making money do not react well when they start losing it.   

So you meet your new client.  Unceremoniously sacked two weeks before his/her bonus was due.  He/she’s been told he/she won’t get his/her bonus. He/she’s out of a job and, unlike a couple of years ago; he/she’s not being chased by head-hunters. Job prospects look very, very bad. He/she wants to sue for bonus and for anything else he/she can sue for.  He/she’s gone from master of the universe to another (very) angry ex-employee in the space of two weeks.  He/she wants revenge.

So we’re the employment lawyers – are we going to teach those arrogant banks a lesson? Are we going to hit them hard and hit them fast?

Er…well, before we shred the compromise agreement and start on the nasty letters – let’s look at a few harsh truths about investment banks and redundancies:

• bad timing – most city banking redundancies conveniently take place just before bonuses are due and, because most employment agreements will have provisions stating that bonuses are not paid where the individual in no longer employed or is under notice of termination of employment, the employee will not receive a bonus;
  
• bad legals – banks know that the “no stay, no pay” contractual bonus provision referred to above is, for the most part, supported by the courts (see Commerzbank AG -v- Keen). So you can work until 31 January but, if you are sacked before mid-February, when the bonus becomes payable, you won’t receive a penny in bonus for all your hard work during the financial year – and you’ll be out of a job. You can challenge it of course. There is a slim, if not anorexic, line of authority that an employee whose employment is terminated simply so the employer does not have to pay bonus might have an action for a breach of the implied duty of trust and confidence and even an implied term of “anti-avoidance” (see Commerzbank and Takacs -v- Barclays Services Jersey Limited).  But to challenge it you need to bring legal proceedings and, as well as virtually inhuman levels of resolve, you need money, plenty of it and……you’ve just been sacked with no bonus. Not the best time to take on an investment bank, a well-resourced and ruthless opponent with a lot of money;
  
• bad payouts – with law and money on their side, the banks can call the shots. Compromise agreements will rarely offer generous amounts, whether for compensation for termination of employment or legal costs. To make it worse, banks normally have the flexibility of a firing squad when it comes to negotiating;
  
• bad options – you’ve just been sacked with no bonus, the compromise agreement offers you your champagne budget for last year, and the bank is not flexible - what can you do? You can sue of course – you’ve been treated shabbily, black-bagged out of the office, humiliated, and you are already in financial difficulty.  But the UK’s tight regulatory employment regime will help you out – surely the banks can’t get away with this – right?
  
• wrong– they can and they will.  Let’s look at the options - (A) you may have a lousy payout and no claim for bonus, but you can always bring a claim for unfair dismissal, the UK’s primary employment protection claim. Great idea boss– compensation is capped at a whopping £63,000, you have to pay your own legal costs which are not recoverable if you win – and, win or lose, once you sue an investment bank you are banker non grata - the silky head-hunters and snazzy executive search consultants would rather walk barefoot in radioactive waste than put you forward for a job. If you really want to ruin your high-flying city career, you can sue for discrimination on the basis of a discriminatory dismissal (see below) – banks will love you for that.  Better be looking at career loss if you go for that option.
  
• OK – unfair dismissal is a bad idea.  Discrimination is tricky and very speculative. So to option (B) what about a claim for loss of bonus?  You were paid £760,000 last year.  Surely you can sue for a similar sum for this year – surely you can’t work incredibly hard for a whole year and, just because you get sacked 14 days before your bonus is due to be paid, still not have much of a claim. Er, sorry to be the pessimistic employment lawyer again but, if you were dismissed before the date the bonus was due to be paid and the contact has a “no stay, no pay” clause, any claim for bonus will be speculative and expensive. You will be relying on implied terms in the high court and even if you win (making history in the process) how much unpaid bonus will you get?
  
• So on to option (C) possibly not much - the bank, now having lost its historical case and faced with having to pay your discretionary bonus, may well say something along the lines of “...well, he got £760,000 last year but (a) this was a terrible year with the US sub-prime [insert legally vetted 500 words about poor economic conditions, credit crunch etc] so the bonus will either have been a nil bonus or very low and (b) this employee was made redundant in 2008 because he wasn’t that good and his figures were down [insert legally vetted suitable wording about employee never really being up to scratch and include selected (and poor) extracts from appraisals etc].  So, even though the court has made history and we at the bank have to pay up, we will exercise our wide discretion and award £50,000 (about as much as much offered in the compromise agreement to begin with).
  
• surely the bank can’t do that?!
  
• oh yes it can. In Commerzbank, the court was quite clear about the ambit of a bank’s discretion in awarding discretionary bonuses. It can be reduced to one word, WIDE, or even two, VERY WIDE. In order to show that the bank did not exercise its discretion lawfully, you have to show that the discretion was exercised irrationally or perversely. In Commerzbank, the court of appeal held that, because banks have such a wide discretion, it would require an “overwhelming” case that the exercise of discretion by a bank was irrational or perverse and the court would have to hold that no rational bank could award the low bonus awarded.  So you would first have to make legal history and then overturn a court of appeal decision (Commerzbank). Hmmmm – maybe that compromise agreement doesn’t look so bad - the market will improve in a year or so, and I do have some savings…………

This article is not designed to be a crushingly serious and analytical account of employee claims against banks but reflects my general pessimism about suing them. A wise man once said you should only sue for one of three reasons, economic gain, principles or spite – and if it’s one of the last two, prepare to lose money.

Despite all this pessimism, however. there are times when the banks get it very wrong. In these circumstances the employee may well be better off shredding the compromise agreement and considering legal proceedings against the bank (and will certainly have more leverage against the firing squad). This tends to happen there the bank, using its dismissal procedure, finds itself on the wrong side of…… discrimination law.

Some have dared to argue, including in Tribunal claims, that there is an overwhelming bias against women at investment banks and that the “boys’ club” environment is both unfriendly to women (particularly those that reach a senior level) and ensures that, when the axe falls, women go first.

If there is sufficient evidence to support a claim for sex discrimination (or any other head of discrimination) then, as would be the case with any other employer, the employee will be in a stronger position. As city employees tend to be well-remunerated and ability to mitigate loss is very limited in a chronically poor job market, the amount of any claim may well be very high. In a more healthy economic climate, the employee might move on to another bank.  In the current climate, however, the employee might be more inclined to litigate.

So although the scales are normally heavily weighted in favour of banks, no matter how ruthlessly they may operate, a genuine discrimination claim will run and, bearing in mind the sums involved, could involve very big bucks indeed.  

The employee will certainly be committed – he/she will be banker non grata, the city career is gone, and only very big bucks can compensate for that.

And at times like this, employment lawyers can be very dangerous people.

Author: David von Hagen, Employment Partner.

Appeared in Legal Week published 19th June 2008.