With bonus season upon us again it is timely to remind ourselves of some of the more tricky issues that should be considered before announcements are made.
Of course the starting point is always to be familiar with the rules of your scheme and clear as to whether the scheme you operate is contractual, discretionary or a mixture.
Most of the schemes that we see are a mixture, where employers provide the employees with a contractual right to participate, but the amount of the bonus is at the employer’s discretion.
So, what are the issues that employers need to be aware of when operating such schemes?
The limits on the exercise of discretion
Even where the bonus clause in question apparently provides the employer with full discretion when deciding the amounts payable when exercising such discretion an employer must not act “perversely or irrationally”.
What does this mean? Some guidelines:
- Guess work should be avoided and amounts should be carefully considered and justified, taking into account the value of bonuses paid to other employees and amounts paid in previous years. Paperwork to support this thought process is recommended.
- Consistency is important and a moderation process is a helpful way to achieve this.
- Be aware that where no bonus is paid, the implied duty of trust and confidence will generally require the employer to give reasons to the employee for the decision.
Discrimination considerations
Most employers will be well aware of the need not to treat employees less favourably on the grounds of issues such as sex, race and disability in any direct way. However, there will also be cases where the discriminatory effect is less obvious. For example, employers must take care to ensure that they do not unjustifiably discriminate against part-time employees who should generally be given a pro-rated entitlement. Agency workers will also need to be considered because, after the 12 week qualifying period, they will become entitled to the same “pay” as equivalent permanent staff. “Pay” for this purpose includes some types of bonuses, although not all.
Dealing with absent employees
Payments to employees on maternity, paternity or parental leave need to be carefully considered. Unfortunately the position under UK law is complex and in places inconsistent as a result of conflicts between domestic legislation and EU jurisprudence. In the case of employees on maternity leave who have an entitlement to be considered for a discretionary bonus scheme which relates to performance, it is likely that they would be entitled to a pro-rated amount to cover the period before maternity leave, the two week period of compulsory maternity leave and any period following a return from maternity leave. However, if the bonus is more of a one-off discretionary loyalty bonus than a payment for work done, there may be a requirement to make a full payment without any pro-rated reduction. If you are in any doubt as to the proper operation of your scheme, this is an area where proper legal advice is essential.
Other issues to consider are absent employees who are away from the office on long term sick leave or who have had time off as a result of a disability which makes it more difficult for them to reach bonus targets. It may be permissible to pro-rate the bonus to reflect only the days during which the individual has been present in the office, but this is not always the case. The duty to make reasonable adjustments, which applies where an individual has a disability under the terms of the Equality Act 2010 may mean that it is necessary to adjust targets or disregard absences that relate to the disability. All of these cases must be considered individually.
The key to defending challenges is to ensure a documented and justified decision making process and to recognise the risk and consider the tricky cases before announcements are made.
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