The UK’s failing banks, so recently bailed out by the taxpayer, are maintaining that they still have to pay their employees bonuses of up to eight figures. Legally, if perhaps not morally, this is correct.


Entitlements
The problem lies in the past. The City maintains that bonuses were the sole way of attracting qualified staff. The High Court has said that even “discretionary” bonuses are actually entitlements. If the banks withheld these bonuses, the employees could claim:
• breach of contract;
• constructive unfair dismissal;
• unlawful deduction from wages, if the amounts are quantifiable.

This would drag the banks into expensive litigation.


Guarantees
Banks that guaranteed bonuses are bound by them contractually. The government can pressure them to change arrangements for the future, but denying current entitlements would probably require a new law making such payments illegal. This would send a message to the international business community that otherwise binding contracts made in the UK can be torn up by the government as soon as they become politically embarrassing.


Choices
The banks’ options are limited. They could change existing contractual arrangements if the employees agree or introduce new contracts. They could give notice of bringing the old contracts to an end, and offer fresh terms and conditions with no guaranteed bonus. This risks claims of unfair dismissal, but banks could use the “some other substantial reason for dismissal” defence in the light of the new financial reality.


Sacrifice
Bankers may agree to waive their individual bonuses. Eric Daniels, chief executive of Lloyds Banking Group, gave up his £2.25 million entitlement as a result of pressure from a parliamentary select committee. Some bankers may consider this option as a way of avoiding redundancy, but banks cannot force other employees to do the same.