The UK High Court recently confirmed that incentive pay may be conditioned upon good behavior.  In Imam-Sadeque v BlueBay Asset Management (Services) Ltd [2012] EWHC 3511 (QB), the court concluded that forfeiting incentive pay for bad behavior does not constitute an unlawful penalty.  In that case, an employee and employer had entered into a release agreement under which the employee was deemed a “good leaver,” provided he complied with the terms of his employment contract.  The employee later breached implied obligations of fidelity during his notice by providing confidential information to and otherwise assisting a potential competitor.  The employer refused to grant the employee any unvested awards and the employee sued, claiming among other things that forfeiting unvested incentive awards in such circumstances amounted to an unlawful penalty. 

The High Court rejected the employee’s arguments, finding that:

  • The provision in the compromise agreement did not forfeit a benefit; rather it conferred a conditional benefit:  the right to reclassification as a “good leaver,” which never accrued because the employee failed to satisfy the pre-conditions.  His failure to comply with these conditions and to accrue the rights under the compromise agreement meant that his rights under the incentive plan remained unamended.
  • In the alternative, only future contingent benefits in the unvested awards were forfeited.  That is not equivalent to the requirement for repayment of a punitive monetary sum or the transfer of property, so the penalty doctrine is not engaged.
  • In any event, even if the penalty clause doctrine were engaged, the relevant clause was commercially justified and, therefore, not penal.  The compromise agreement contained a bundle of rights and obligations which had been freely negotiated between parties of comparable bargaining power.  It would be contrary to the commercial objectives of the incentive plan if the employee could act in serious breach of his contractual duties and still receive a benefit.

The case serves as a reminder to UK employers that incentive pay may be conditioned upon good behaviour.  UK employers may wish to consider whether incentive pay awards and arrangements are drafted to ensure that the employer is not required to pay incentive pay to employees or former employees who have acted adversely to the company.