Bonus awards: Five top tips

Bonus season is looming and with it, the possibility of disgruntled employees challenging the awards they receive, if any. To mitigate against the risk of successful challenges, employers should observe the following top tips when making their awards:

1. Do you need to exercise a discretion in determining bonuses? 

Although discretionary bonus schemes allow employers a reasonably free rein when it comes to determining awards, there’s still a risk of a legal challenge if discretion is exercised in bad faith, irrationally, unreasonably or capriciously. 

Accordingly, when determining bonus awards it’s important to have some form of justification for the decisions which are made, whether it’s meeting key performance indicators, generating a certain level of revenue or scoring well in an appraisal. 

2. Be consistent

If employees who are eligible for a bonus are performing similar roles, at a similar level and with similar results, they most likely should receive a similar level of bonus award.  Where employers award different levels of bonus to employees whose contributions to the business are ostensibly the same, there is a risk of an employee arguing that they’ve been awarded a lower bonus than their colleagues because they have a protected characteristic and bringing a discrimination claim on this basis.

Employers should therefore make sure that bonuses are awarded consistently across the employee population and that any variations in the amount of awards made within a similar group can be objectively justified. 

3. Watch out for employees who are not in the office

Out of sight, out of mind, or so the saying goes! However, it’s important that you don’t follow this maxim when it comes to making your bonus awards. Depending on the terms and purpose of the bonus, employees on maternity leave or absent with long-term sickness may still qualify for an award. 

If a bonus is paid to reward past performance, employers may need to pay a pro-rated bonus to absent employees to recognise the period they had spent in active employment at work. Similarly, if an employer pays a bonus to all employees irrespective of individual performance, for example, a one-off Christmas bonus, absent employees may also be entitled to receive this. 

If an employer gets this wrong it could lead to a costly discrimination claim so make sure you check the position before confirming awards. 

4. Regulatory complications

If an employer operates in a regulatory environment (for example, if it is a listed company or regulated by the PRA/FCA) there may be additional restrictions on the bonus awards it can make.  For example, there may be limitations on the size of awards which can be made, the nature of the awards (i.e. cash or shares), requirements in relation to deferral of awards and clawback and malus. 

If in doubt, check what your regulatory limitations and obligations are as getting this wrong can create serious issues, not only with the employee in question but also with the employer’s regulator. 

5. Keep an audit trail of the decisions you make

All employers are at risk of employees challenging a bonus decision, irrespective of the award made and the thought process behind it. So as to protect themselves from spurious claims, it will be important for employers to keep a paper trail of the decisions they make in relation to bonus awards, plus the rationale for making them. 

If you are concerned about any of the points raised here please contact Daisy Jones or your usual Fox Williams contact.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.