Category: Employment Law

Take care when labelling a bonus as discretionary in a contract

The High Court recently ruled on the interpretation and enforceability of “discretionary” bonus provisions in employment contracts. Mr. Gagliardi brought a breach of employment contract claim against a former hedge fund which had contracted him as a senior portfolio manager. The contract in question included a salary, a sign-on payment, a new-issue bonus, and a discretionary bonus based on profitable revenues. Mr. Gagliardi was specifically recruited by the CEO to expand into the US market owing to his expertise in block trading and his valuable relationships with major US banks. The hedge fund’s primary goal was to secure the benefit of these relationships and scale its business quickly, with the CEO tacitly acknowledging that they were essentially “buying his relationships,” hiring Mr. Gagliardi on a “trade and get paid” basis.

Upon joining, Mr. Gagliardi immediately began actively trading in the A1 share class without completing his onboarding process or receiving formal risk limits, leading to conflict with the CIO and risk manager. However, the CEO consistently prioritised Mr. Gagliardi’s trading activity over internal procedure, despite him often exceeding specified trading limits, frequently granting retrospective approval. Mr. Gagliardi’s lack of attention to compliance was also overlooked, as the CEO continued to prioritise profitability. However, a market-wide regulatory inquiry into block trading led to subpoenas to the claimant and the hedge fund by early 2022, prompting the fund to withhold payment of his discretionary bonus. This led the claimant to sue the hedge fund for breach of contract.

The High Court ruled in favour of Mr. Gagliardi, awarding him $5.385m in damages (plus interest), determining that his former hedge fund had indeed breached its contractual obligations in failing to award him any discretionary bonus for his trading activities in 2021. The Judge ruled that the hedge fund’s contractual discretion (governed by Delaware law) was neither broad nor unfettered and, as such, was subject to prescribed contractual criteria.

Despite the use of the term “discretionary,” the High Court has affirmed the principle that an employer’s discretion is not absolute where a bonus is tied to measurable performance criteria such as revenue contributions and profits. This ruling emphasises that, where an employee delivers exceptional financial performance, an employer cannot arbitrarily or irrationally refuse to pay a bonus, as this would constitute a breach of contract, irrespective of any allegations of minor breaches, misconduct or poor attitude that did not reach the threshold for disciplinary action or termination over the period in question. Employers should thus take care over phraseology when structuring discretionary bonuses into contracts.

Suing whistleblowers for a breach of confidence is not a viable strategy

The Court of Appeal has ruled that the initiation of legal or arbitral proceedings by an employer against a ‘whistleblower’ who has made a protected disclosure constitutes an actionable detriment under the Employment Rights Act (ERA) 1996, effectively overriding the defence of Judicial Proceedings Immunity, or JPI. 

In November 2021, the claimant, initiated Employment Tribunal proceedings against his former employer for post-employment detriment as a consequence of whistleblowing. The claimant, who had worked at his employers’ London residence until his resignation in 2019, alleged that he made protected disclosures regarding instances of verbal and physical abuse by his employer directed at members of staff.

The respondent’s defence was that the claimant had made the allegations for financial gain rather than for altruistic reasons, had breached a confidentiality and independent consulting agreement under ICC Rules, and was effectively running an “extortion scheme” by making “false claims”.  

The Court allowed the appeal based on the protection of whistleblowers by the ERA 1996, concluding that this statutory protection overrides the common law doctrine of JPI. In the Court’s view, allowing an employer to use litigation as a shield against a whistleblowing claim would render the legislation meaningless, as Section 47B(1) of the ERA provides a right not to be subjected to “any detriment by any act” by an employer for making a protected disclosure, including any perceived breach of confidence, as such a mechanism would effectively enable employers to escape liability by suing whistleblowers. Moreover, under Section 43J of the ERA, any confidentiality agreement that precludes a protected disclosure is deemed to be void.  

Thus, the initiation of legal or arbitral proceedings by an employer against a worker, when executed on the ground of a protected disclosure, is actionable as a detriment under Section 47B of the ERA. This ruling effectively prevents employers from using litigation as a de facto penalty or “punitive tool” to harass or financially pressure a whistleblower. The Court has now established that this protection is not limited to threats, but also extends to the act of commencing proceedings. Employers should note that they cannot simply bypass Section 43J by enforcing a confidentiality clause through arbitration proceedings. 

Employers may now be personally liable for unfair dismissal claims

A recent ruling has increased the scope of statutory protection for whistleblowers to include covered detriments against co-workers under the Employment Rights Act 1996. A Mr. Rice was dismissed by his company owner on the grounds of redundancy in February 2021. Mr. Rice asserted that his dismissal was automatically unfair, given that it was motivated by his protected disclosures. He subsequently applied to amend his claim to include a detriment claim against his owner-employer, alleging that his dismissal was a detriment in contravention of Section 47B of the Act. The core issue arose when he sought to amend his claim to include an additional complaint, specifically that his dismissal constituted a detriment inflicted by a co-worker, for which the owner was vicariously liable under the 1996 Act.

This principle states that the exclusion (Section 47B) only bars a direct detriment claim against the employer for its own act of dismissal. However, it does not bar a claim against a co-worker (under S. 47B(1A)) for the detriment of dismissal. Consequently, if a co-worker is liable for the act of dismissal as a detriment, the employer automatically becomes vicariously liable for that act under Section 47B(1B). This effectively allows the employee to bring a detriment claim against the employer for the act of dismissal itself. 

The ruling creates a crucial pathway through which employees may obtain a more comprehensive remedy for the act of dismissal, no longer solely restricting whistleblowers to a claim of unfair dismissal. This significantly increases the potential value of any award for damages, particularly in distressing cases.

Employees can now pursue the individual co-worker who carried out the dismissal – in this case, the owner of the firm. This is an important concession, especially where a company becomes insolvent, as the personal liability remains. Employers should be wary of their conduct toward whistleblowers, as they may find themselves personally liable for their words and deeds.

When disciplinary processes and non-compete clauses implode

Many modern companies insist on the inclusion of restrictive covenants to limit the freedoms of employees upon the termination of their contracts. However, the High Court recently reinforced the stringent legal principles governing the enforceability of such restrictive covenants, suggesting that they often overstep.

A young man had been working as a salesperson for a UK subsidiary of an American company that sells made-to-measure suits and shirts manufactured in the USA. His original contract included restrictive covenants limited to 6 months. However, the contract was changed in 2022 to double the duration of the non-compete covenant to 12 months and remove the previous reliefs, significantly widening their scope. The employee asserted that he was not informed of these changes, and the claimant failed to produce any evidence to justify the widening of the scope of the limitations or the doubling of their duration.

The employee’s initial performance was strong, although following a conduct issue in January 2025, he was subjected to an addendum requiring humiliating and intrusive conditions, including weekly “counselling”, a ban from earned trips, and exclusion from leadership roles. The ex-employee had also raised product quality concerns, which he felt were ignored, and found the work culture ‘toxic’ and the disciplinary action both unfair and intrusive. As a consequence, he resigned in frustration in 2025, only to be subjected to an “insensitive, verging on brutal” retaliation. Within two days, the HR manager had cut off all IT access, threatened an investigation, and banned the defendant from the office. A day later, on Sunday, the claimant’s lawyers hand-delivered a threatening letter to the defendant’s home seeking to enforce a 12-month restrictive covenant. Moreover, there were claims that the defendant had breached his contractual duties, including running down his sales in the months prior to his resignation, and soliciting staff.

The High Court dismissed the claim for breach of contract and ruled that the 12-month restrictive covenant was unenforceable, as it far exceeded what was reasonably necessary to protect the claimant’s business. Moreover, the Court found the decline in performance to be stress-related and due to his inevitable demotivation.

This case reinforces the longstanding principle that courts will not uphold a covenant if it extends beyond what is strictly necessary to protect an employer’s legitimate business interests, which are typically delimited to confidential information and customer goodwill. The case serves as a warning in relation to the risks employers run when their conduct is perceived to be heavy-handed, humiliating, or toxic, particularly during disciplinary or exit procedures. HR departments should be wary of engaging in overtly humiliating or heavy-handed disciplinary rituals, as these may be viewed as a form of brutality.

Early termination of probation can constitute wrongful dismissal

The claimant began employment as a Contracts Coordinator on 23 January 2023, subject to a contractual 6-month probationary period, one which required 5 weeks’ notice for termination. The contract included a garden leave clause, but no clause permitting Payment in Lieu of Notice (PILON). 

Disputes soon arose over his work patterns and behaviour, and by 22 February 2023, the claimant had emailed the respondent detailing an irrevocable breakdown in trust and confidence. On 3 March 2023, HR obtained authorisation to dismiss the claimant, citing inflexibility, divergent values, negative communications, and uncooperative behaviour.

The decision to terminate his employment had in fact already been made, even though a “Formal Probation Assessment Meeting” had been scheduled for 15 March, on which date he was dismissed with immediate effect and paid 5 weeks’ notice monies. On 24 March 2023, he appealed the dismissal while seeking an assurance that he would not be reinstated, affirming that neither party wished the employment relationship to continue. The employment tribunal found that the claimant had not been wrongfully dismissed, despite accepting that the respondent had breached the contract by instituting a PILON.

The appeal tribunal found that the first tribunal had erred in law by failing to find that the claimant was wrongfully dismissed, as the employment contract did not contain a PILON clause and the employer’s action in dismissing the claimant with immediate effect and simply handing over the notice pay constituted a breach of contract. However, it upheld the earlier decision not to award compensation after applying established common law principles for assessing damages, which assume that the employer would have terminated the contract in the least burdensome way that was lawfully available. The appeal tribunal rejected the claimant’s argument that damages should be subject to the “Gunton extension” to cover the full 6-month probation period. As the issue was a fundamental breakdown of the employment relationship, the employer was entitled to rely on the simpler, contractual 5-week notice clause, rendering the lengthier procedural steps irrelevant in the calculation of damages.

This case offers a stark reminder that, if a company wishes to dismiss an employee with immediate effect and simply pay them in lieu of notice, then the contract must explicitly include a PILON clause, or any immediate dismissal (even with payment) is effectively a breach of contract. While no financial damages were awarded in this specific instance, it nonetheless positions an employer on the wrong side of the law and can complicate any prospective litigation.

Don’t be tempted to withhold pay as a form of leverage

Ms Constantine had been a veterinary surgeon since 2017. Initially, she had worked every day with two half days rest, but this increased to four full days and a weekend every three weeks. Moreover, she was required to seek permission to be absent on those days she was not required to attend work. In November 2020, Ms Constantine began a sickness absence, claiming burnout, and was certified as being unfit to work from 1 December 2020 to 4 January 2021 due to anxiety. In May 2021, a ‘fit for work’ statement recommended one day a week, which was subsequently increased in June 2021 to one and a half days a week, with at least one day off between workdays. 

Following a meeting on 22 June 2022, the respondent agreed to look into issuing a new contract for a three-and-a-half-day week with two in six weekends. A proposed contract with a covering letter dated 24 August 2022 was sent to the claimant with a £23,267 gross salary per annum, which was not in alignment with the agreed basis that it should be based, pro rata, on her previous full-time salary of £44,000 p.a. The claimant contended that the revised salary calculations were severely flawed and effectively constituted a 22.4% pay cut based on a new notional denominator of 260 working days in the form of a ‘take it or leave it’ offer. 

Further, a series of unauthorised wage deductions had been made from May 2021 to 31 July 2023, and Ms Constantine ultimately resigned in 2023, lodging a formal grievance on 14 March 2023, specifically complaining about the basis of the calculations of her pro-rata pay from May 2021, asserting a breach of the Part-Time Worker (PTW) Regulations 2000 and unlawful deduction from wages.

The Tribunal ruled in favour of Ms Constantine, finding an unlawful deduction from wages, constructive unfair dismissal, and unfavourable treatment arising in consequence of disability, and she was awarded a total of £19,017.  Ms Constantine was deemed to have been a disabled person from December 2021 due to chronic fatigue, as the respondent should have known, and the act of proposing a new part-time contract in August 2022 at a disproportionately low salary constituted unfavourable treatment arising from the claimant’s need to reduce her hours due to disability (s.15 Equality Act 2010).

The claim for constructive unfair dismissal was upheld because the respondent had committed a fundamental breach of contract by withholding admitted back pay and making its payment conditional on the claimant agreeing to the proposed future salary. Finally, the Tribunal found that an unauthorised deduction from wages had occurred, applying the Apportionment Act 1870 to set the lawful deduction rate at 1/365th of the annual salary for days the claimant was rostered to work but was absent.

When seeking to reduce an employee's hours, any resulting contract must be calculated correctly on a pro-rata basis in accordance with the PTWs. Employers must prove that any proposed pay revisions are not only fair, but also "necessary and appropriate" to achieve a legitimate business aim. Above all, employers must never deliberately withhold payment in an effort to coerce an employee into agreeing to new contractual terms. Such an act risks breaching the implied term of mutual trust and confidence, creating grounds for constructive unfair dismissal.

Risks of engaging employees as sham contractors

Recently, a clear legal precedent confirmed that the nature of an individual's work is determined by the reality of the actual employment relationship rather than by arbitrary titles. Mr. Gooch worked for the British Free Range Egg Producers Association (BFREPA) from 1 November 2011 until 26 April 2024, initially as a Policy Director on a "contracted services basis" for 2.5 days per week. The organisation, originally an unincorporated association, subsequently became an incorporated company in 2023 (BFREPA Ltd.), although the nature of its work was unaltered.

As Mr. Gooch's role evolved, so his compensation increased and, by 2016, he had effectively been promoted to Chief Executive of Services. Throughout his 12.5 years of engagement, he consistently submitted monthly invoices and was paid a retainer due to his self-employed status, without formally establishing a limited company. In February 2023, BFREPA's leadership expressed concern that their arrangement with Mr. Gooch looked remarkably similar to an employment relationship rather than a self-employed contract, even suggesting that the HMRC would likely classify him as an employee.

As a consequence, in March 2023, BFREPA gave him 12 months' notice of termination, and he continued working until April 2024, at which point his email access was disabled, and he received a letter confirming that his contract would not be renewed. Mr. Gooch duly lodged claims against both defendants for unfair dismissal, unauthorised deductions from wages, unpaid holiday, wrongful dismissal for failure to pay statutory notice, and breach of contract relating to pension auto-enrolment. 

The Tribunal ruled that the claimant was a de facto employee, working under a contract of employment as defined by Section 230(1) of the Employment Rights Act 1996, Section 2 of the Working Time Regulations 1998, and Section 88(2) of the Pensions Act 2008. The Tribunal further concluded that personal service was a core requirement of the contract, one which contained no general substitution clause, and that the extent of the control was consistent with an employer-employee relationship for a senior employee alongside other strong indicators of a permanent employment relationship. The contracts also contained restrictive clauses that limited his ability to work for other companies in the same sector, a feature more commonly found in employment contracts than in contracts for service. 

This ruling provides a clear and detailed example of how a tribunal will look beyond the contractual terms to assess whether a person is an employee or a self-employed contractor. Employers cannot rely on a "contract for services" or a person's self-employed status to avoid the legal obligations of an employer. Instead, tribunals will scrutinise key factors such as the mutuality of the obligations, the degree of control, and the extent of integration in the business. Employers who treat long-term contractors like employees—providing them with a fixed monthly retainer, dictating their hours, and effectively integrating them into the business—risk having them reclassified as employees, and HR departments should ensure that contracts reflect the true nature of the relationship to avoid repercussions. 

Balancing access to justice and abuse of process

An extended civil restraint order (ECRO) was issued against a prolific Employment Tribunal (ET) litigant for presenting repeated and baseless claims.

A Mr. Khan has been described as a prolific litigant, having issued no fewer than 42 largely unsuccessful tribunal claims since 2017. These various failed claims have typically involved allegations of disability discrimination and a failure to make reasonable adjustments in recruitment processes. Many claims were struck out for having no reasonable prospect of success or simply as an abuse of process. Only two claims, levelled against solicitors' firms, were settled for "nuisance value payments" of £700 and £1,000. Mr. Khan has also made many unsuccessful applications to adjourn hearings, often on medical grounds, alongside numerous failed attempts to challenge ET decisions.

The High Court granted the claimants’ application for an ECRO, restraining the defendant from issuing or presenting claims or appeals related to job applications in the tribunal system without prior court permission for a period of three years. 

This decision strengthens the mechanisms available to safeguard judicial processes from abuse. It reaffirms that higher courts can step in to protect tribunals from those individuals who repeatedly file baseless claims or appeals without legal merit. This is crucial for preventing the system from being overwhelmed by vexatious litigation, ensuring that resources are available for legitimate disputes.

For individuals who represent themselves in court, while the judiciary strives to ensure fairness and assist unrepresented parties, the case firmly reiterates that procedural rules and the fundamental principles of legal merit still apply. It demonstrates that courts will not tolerate the deliberate misuse of legal processes. Thus, employers and their legal counsel should be wary of disgruntled employees with histories of spurious claims and seek to have baseless claims struck out on such grounds.  

Tripartite arrangements don’t necessarily enable an agency to escape accountability

The question was raised as to whether, in a tripartite agency relationship, an employment relationship exists between an employee and their intermediary agency. For instance, Ryanair DAC employs some pilots directly, while subcontracting others. A Mr. Lutz successfully applied to an advertisement for pilots and was contracted on 10 August 2017 by MCG Aviation Ltd. (now Storm Global Ltd.). From July 2018 to January 2020, Mr. Lutz served as a Ryanair-contracted pilot based at Stansted, nominally supplying his services through his own Irish company, Dishford Port Ltd., although it is now accepted that his direct relationship was with MCG. 

Following an incident with Ryanair management on 13 January 2020, MCG terminated its contract with Dishford, effectively ending Mr. Lutz's services. He then brought two claims to tribunal with the support of the British Airline Pilots Association (BALPA) concerning annual leave against MCG under the Civil Aviation (Working Time) Regulations (CAWTR) 2004, and also an equal terms claim against both MCG and Ryanair. Through this action, Mr. Lutz was seeking compensation for not being afforded the same working conditions as employed pilots under the Agency Workers Regulations (AWR) 2010. 

The tribunal found in Mr. Lutz's favour, holding that he was a "crew member" employed by MCG under CAWTR and also an "agency worker" under AWR. Subsequent appeals by Ryanair and MCG were dismissed as, where a worker is supplied by an agency (B) to a principal (C), but has an explicit contract with the agency, the agency remains the employer. Mr. Lutz's services to Ryanair were thus explicitly governed by his contract with MCG, which expressly stated that he was not employed by Ryanair. The fact that Ryanair exercised exclusive direction and control over Mr. Lutz's work does not necessarily create an implied employment contract or relationship with Ryanair, although it befell MCG to ensure that Ryanair respected the relevant employment laws. Moreover, even though Mr. Lutz had a fixed-term contract for several years, it was nonetheless "temporary", thereby creating a gap in protection for agency workers and introducing ‘unacceptable uncertainty’. 

This case reinforces the "substance over form" approach in determining employment status, in that employers can no longer solely rely on contractual labels such as "independent consultant" or "self-employed" as a pretext to deny workers their employment rights, especially in such tripartite agency arrangements. Thus, agencies should understand that workers employed for extended fixed terms are likely still covered by the AWR and thereby entitled to the same T&Cs as direct employees after 12 weeks. Hence, agencies still have clear responsibilities for certain statutory rights, and businesses relying on "supply chain layering" to outsource labour will need to review their structures.

A magical clause does not necessarily nullify employment status

A recent ruling has provided a timely reminder that substance trumps form in employment status disputes, and the mere insertion of a clause does not automatically change the employment status of workers. This case concerns an appeal by BCAL, a company that provides vehicle collection, inspection, delivery, and transportation services. The core dispute revolves around the employment status of hundreds of individuals who work as drivers for BCAL.

The standard-form contract contained a term that permitted the drivers to make use of a substitute. However, a central issue in this case was whether the substitution clause was indeed "genuine". 

BCAL instructs drivers via an app, and they generally have no choice over job location, number, or type, although they can decline jobs. However, the Tribunal found evidence of a practice of punishing drivers for refusing work on available days. BCAL sets the fees for each job, with no power of negotiation available to drivers, and drivers are obligated to pay weekly administration and insurance contributions. BCAL pays for and issues DVLA trade plates to drivers, which are essential for driving unregistered/untaxed vehicles for business, and the drivers cannot obtain these themselves. Drivers are provided with branded items in the form of a badge, a hi-vis vest, a phone with an app, a fuel card, inspection equipment, and PPE. Newly recruited drivers must undertake a mandatory four-day in-person training course and receive a detailed training manual, which is regularly updated.

The Tribunals both found that the substitution clause in BCAL's contracts was not "genuine". This case strongly reiterates that the written terms of a contract, particularly a substitution clause, are not conclusive when determining employment status, as tribunals will rigorously examine the true intentions of the parties and the reality of the working relationship. If a contractual right, such as substitution, is not genuinely intended to be exercised or is an "unrealistic possibility" in practice, it will be disregarded.

Companies cannot simply insert a substitution clause into their contracts and assume this guarantees self-employed status. Instead, the right to substitute must be genuine, practicable, and exercised. This ruling carries profound importance for companies that employ people remotely via apps, as merely inserting a clause to infer that such employment is truly flexible can be overturned if it isn’t exercised.