Recent research by Unum and Personnel Today shows that 55% of employers are continuing to operate bonus schemes despite the recession. Bonuses can be a huge attraction for recruitment into businesses and indeed, are expected in many sectors. However, problems can arise when the rules of any bonus scheme are unclear or aren’t documented.
Non payment of a bonus to an employee can lead to claims by employees for:
• unlawful deduction from wages in the Employment Tribunal; or
• breach of contract in the Employment Tribunal; or
• breach of contract in the civil courts.
If the claim is for breach of contract there are advantages and disadvantages to bringing the claim in the Employment Tribunal. For example, the maximum the Employment Tribunal can award for breach of contract is £25,000, whereas there is no limit in the civil courts. There are also different costs rules in the courts, whereas it is still relatively rare for costs to be awarded in the Employment Tribunal. The time limit is also a consideration – for the Tribunal it is usually 3 months from the date of termination of employment, whereas in the courts it is usually 6 years from the date of the breach.
Most employers wish to make sure bonuses are discretionary so that there is no obligation to pay a bonus if, for example, the company has not made enough profit over the financial year. The question can arise as to whether a bonus payment is genuinely discretionary, or whether it is in fact a contractual entitlement which must be paid and could be considered part of an employee’s wages. This could entitle an employee to make a claim for unlawful deduction from wages in the Employment Tribunal.
The starting point to determine this, as with many employment benefits, is to look at what the documents say. There may be a clause within a contract of employment related to a bonus payment, or there may be a policy in a staff handbook or an entirely separate bonus scheme document.
The appearance of a clause in a contract of employment may indicate that the bonus is a contractual entitlement. However, quite often this is based on discretionary elements, such as particular performance criteria being met by the employee. This can mean that a bonus payment must be paid; but the amount that is paid may vary and could in reality be nothing if the employee has not met the specified criteria for a bonus.
It is of course fundamental that employees are assessed in relation to any bonus criteria in a fair and reasonable manner, as treating some less favourably than others could potentially be discriminatory or a breach of the duty of trust and confidence. The criteria used must also be reasonable and objective. It is important to make the criteria clear and transparent to all employees to avoid issues. If an employee fails to achieve a bonus then it is best to make it clear to them why they have not achieved the criteria and how they could improve their performance for the next round of bonus payments.
The conclusion that a bonus payment is discretionary may be much easier to come to when bonus schemes are specified in a policy or separate document rather than a contract of employment. However, this is not the only factor to consider and an entitlement to a bonus can be construed by virtue of custom and practice, such as where the same bonus has been paid year on year to all employees and they have an expectation that they will be paid a bonus.
The other consideration is bonus payments upon termination of employment. This issue has produced a wealth of case law over the years. A particular case of note in the Employment Appeal Tribunal involved an employee who resigned a few days before he would have been entitled to a bonus payment. The bonus scheme was not set out in writing as such, but there were some provisions in the contract of employment which purportedly said that in order for an employee to be eligible for a bonus, the employee must remain in employment and also not be under notice at the payment date. The Tribunal held that in fact these provisions were imprecise and not clear to the departing employee; had he been aware than it was reasoned that he would not have resigned until after that date (Noble Enterprises v Lieberum, UKEAT 67/98). Using another example, where an employee has been summarily dismissed for gross misconduct but has a contractual entitlement to receive a bonus they may be able to claim this payment. To avoid the issue, most bonus schemes specify that employees dismissed for gross misconduct are not entitled to any bonus.
If you would like to talk through a situation you are dealing with, or if you need advice on any aspect of employment law, please contact any member of the Pure Employment Law team (01243 836840 or [email protected])