Employers can offer many different types of bonuses for many different reasons. From profit shares to retention bonuses, or even the traditional Christmas bonus scheme. But there are several considerations before an employer decides not to pay out to certain employees or not to pay at all.
If an employer is considering removing a bonus, the important feature that employers need to be aware of is whether they operate a contractual or discretionary bonus scheme. Not only will this depend upon the very wording of the scheme, but it will also be determined based on how these have operated in practice.
Most discretionary bonus schemes will explicitly state that they are non-contractual, and the organisation reserves the right to vary, amend or remove the scheme at any time with or without notice. A discretionary bonus scheme, however, is arguably an implied contractual term where an employee can show that bonus payments have been made regularly over an extended period and there is an expectation that such a bonus will continue to be paid. A truly discretionary bonus scheme is where the employer is under no obligation to award the bonus. Reminding staff throughout the bonus period, and at the time payment is made, that this is part of the discretionary scheme and there is no entitlement to a bonus at any future date could be seen as compelling evidence that there is no regular expectation of the bonus, and this remains discretionary.
Contractual bonuses are usually the most clear-cut for both parties; employees know what to expect and when, while employers can clearly outline terms which must be met before a bonus is payable. Because of this, amending or removing a contractual bonus is a difficult process. Simply failing to pay staff their contractual bonus, even if an employer does not have the available profits to do so, will breach the contract of employment. This could leave the organisation open to breach of contract claims or even staff resigning and claiming they have been constructively unfairly dismissed.
Due to the difficulty of amending or removing contractual bonus schemes, employers are reminded that they can reduce the likelihood of issues arising by implementing a well-thought-out scheme that is conditional on the performance of the employee and other terms being met. It is very rare that contractual bonus schemes are unconditional because this means that they are payable regardless of the position of the business or the employee’s contribution throughout the bonus period.
Usual conditions which are placed on bonuses include minimum profit levels, either where a bonus scheme is not payable unless a particular profit is hit or where the bonus increases once a minimum profit level is achieved and exceeded; or the employee having to hit certain targets or objectives before becoming eligible for a bonus.
Even with specific criteria in place, caution is needed to ensure that employers do not indirectly discriminate against employees. For instance, if a bonus scheme requires a certain level of attendance, any absences because of a disability should be discounted. Otherwise, an employee will be treated less favourably, and an employee may be open to a discrimination claim.
When deciding whether to pay or not to pay a bonus, careful thought and attention will need to be paid by an employer to ensure that they do not face paying out even more to an employee in the long run if a legal challenge is brought.