2020 has been unpredictable for everyone and if you normally pay bonuses at this time you may be feeling that you may not be in a position to do that this year. However, where does that leave you if there is a contractual right to a bonus?
The first step to take to establish if you have a contractual obligation to pay a bonus is to check employment contracts and find out if there are any references to bonuses. Then consider the following:
It’s likely to be a contract bonus if…
Your employee has a clause in their contract of employment which entitles them to receive a bonus. This may simply be drafted as an entitlement to participate in a bonus scheme, or that it will be paid once individual or company targets are met. Either way, there is a contractual right to be paid a bonus, but what it amounts to depends on the clause saying more than “you can participate in a bonus scheme”.
If there are no specific targets or wording setting out what the bonus is based on, you may have significant discretion on how much you pay. In exercising this discretion, though, you have to act reasonably. You could decide it is reasonable to pay zero this year due to the uncertainty or impact caused by Covid, but beware – see more below.
If, on the other hand, you state in the contract how employees qualify for a bonus, for example, by stating employees will receive a bonus if they achieve £x of sales, then it is more challenging to pay them less than the amount stated – unless the employee agrees to or waives their right to receive this, or agrees to receive less.
A non-contractual bonus is one which is not contained or referred to in the contract of employment. Employers will therefore have discretion on whether or not to pay, and how much to pay. However, again, if you do pay, you have to act reasonably in determining what level to pay.
It’s important to be aware of being accused of unlawful discrimination if you pay bonuses to one person or group and not another, or you pay more to, for example, men rather than women.
While the contract doesn’t mention a bonus, there could be a contractual entitlement if you have paid the bonus and it becomes custom and practice to do so, or if it is referred to in another document which has been incorporated by reference into the contract. If either of these scenarios apply, then it can become an implied term of the contract and a contractual entitlement. If you want to avoid that happening, then don’t make bonus payments at the same time every year so the expectation is not created.
Depending on which type of scheme is in place, you may be able to avoid paying a bonus in 2020, or deferring it until you establish the impact of Covid on your business. If you are considering not paying or deferring it, though, it is important to consider the impact on the ongoing relationship with your employees. Handled well, you can engage in discussions with staff which result in them agreeing to waive their bonus or vary what they receive. Make sure any agreement is recorded in writing.
If it is not handled well, you can face grievances and demotivated staff going into 2021. As with most employment and HR issues, it all comes down to one word – communication. Discuss and explain why a bonus is being paid or not being paid this year.
Can Loch Associates Group help?
Bonuses are often a contentious subject between employers and employees. If you are unsure about the legal position in relation to making bonus payments then get advice first before you do anything. If you have found yourself in a situation where an employee is not happy and threatening grievances or Tribunal claims, then think about bringing in one of our mediators to get things back on track again between you.