Bonus payment

Bonus Payments

Many employees receive some form of bonus payment together with their usual wage/salary. In a large number of cases this may be a modest payment that may be paid at distinct periods, such as annually. For some employees the bonus payment makes up a significant, if not the majority, of their employment income.

Bonuses may be paid under different types of schemes. Such schemes may be described in a number of ways, but basically fall into three broad categories:-

1.      Purely Discretionary – this is when the employer has the right to decide if a bonus is going to be paid, and precisely how much will be paid (if at all). This would include the scenario where an employer makes an ex-gratia payment when an employee has performed particularly well, being a payment outside normal custom and practice.

2.      Partially Discretionary - this is when the contract of employment states that the employee is entitled to membership of the employer’s bonus scheme, but that the amount and method of payment is not clearly specified and is left to the discretion of the employer. In this situation it would appear that the employee may be entitled to some sort of bonus payment, but not definite or defined amount(s).

3.      Fully Contractual - this is the case when the contract of employment states that the employee is entitled to membership of the employer’s bonus scheme, and the structure of the payments and rules of the scheme allow for a clearly calculated bonus payment to be ascertained in any given set of circumstances.

Obviously, if an employer wants to create a bonus scheme it will need to be sure it is properly tailored to its particular business needs and circumstances, as well as ensuring that it is affordable, and that it achieves the objectives for which it is to be set-up (such as to increase productivity, or increase sales, or promote loyalty). The employer will also need to consider if the bonus should reward individual or group achievements, or be a combination of both.

Some employers have to be particularly careful of how the operation of the bonus scheme appears to others, for example their shareholders, or the media. This is particularly so if any bonus appears to “reward” a failing executive. Terms of the bonus scheme should address theses concerns.

Many directors and senior employees expect some form of bonus payment entitlement as part of their overall financial entitlements from their employment.

In operating a bonus scheme an employer needs to be wary of risks of committing unlawful discrimination. In particular the non-payment or payment of smaller than expected bonuses may lead to claims of sex discrimination, discrimination against pregnant employees, or disability discrimination. The failure to pay a bonus, or the payment of a small bonus may be cited as amounting to “less favourable” (discriminatory) treatment. This makes it all the more important to ensure that the scheme is such that it does not lead to discriminatory calculations of bonus payments occurring. It also shows that employers should be prepared to justify the calculation of any bonus payment. 

The current case law relating to bonuses, pregnancy, and maternity leave indicates that in any bonus scheme that deals with bonus entitlement accruing over a designated period must allow that entitlement to accrue over:-

1.      Time (in the bonus period) before the employee commenced her maternity leave, plus

2.      The compulsory maternity leave period (2 weeks), plus

3.      Time after which the employee has returned to work following a maternity leave absence.

Claims concerning bonus payments may be pursued in the County or High Court as breaches of contract. Obviously this is only possible if the bonus entitlement is actually contractual. Alternatively a claim for a bonus payment may be made in the Employment Tribunal if it is alleged that the non-payment (or underpayment) was an act of discrimination. In addition a claim could be taken to the Employment Tribunal under its jurisdiction over unlawful deductions from wages. There is a line of cases which demonstrates that non-payment will be treated the same as an actual deduction from wages. Therefore a disgruntled employee may have a number of avenues open to recover the bonus payment.

The important thing for an employer to note is the need to make sure that any bonus scheme is properly described, defined, and structured, and that all the relevant employees understand the nature of the bonus scheme and of any bonus payment. This should, at least in part, be addressed in the employee’s contract of employment (link to PAYG contract of employment- senior employee, and link to optional clauses on bonuses).