Bonuses

Bonuses are largely a matter of contract but custom and practice are also relevant. In some industry sectors, bonuses are more commonplace than others and may account for a significant proportion of overall remuneration. At the other end of the scale, there are some jobs in which bonuses are rare and/or of token value relative to normal pay. Some bonuses are structured with a primary aim of employee retention (often a fixed amount or percentage of pay) whereas others are related to individual and/or company performance benchmarks and therefore variable.

Sometimes bonuses amount to contractual “promises” of the employer to pay if certain metrics are met, but quite commonly they are termed “discretionary” – i.e. payable only and to the extent that the employer decides to pay a bonus.

Care should be taken in detailing the terms of a bonus not to make it a contractual “right” if the intention of the employer is that it should be discretionary. Conversely, there are some jobs in which, provided eligibility conditions are met (and depending on the contractual wording), it is difficult to argue that the employee will not be entitled to it as part of their remuneration.

In exercising a discretion and differentiating individual performance, employers need to be alive to possible challenges of unfairness and may be required to adjust bonus awards in some circumstances, e.g. where an employee’s performance has been impacted by their disability. Moreover, failure to exercise a discretion properly or evenly can give rise to risks of discrimination claims, claims for equal pay and/or breach the fundamental duty of trust and confidence. It is often helpful for benchmarking or moderation to be applied to counter challenges and advisable in all cases for the employer to have documented their decision making as evidence of their rationale.

When an employee leaves an organisation, the issue of entitlement to a bonus may again arise. Whether they are entitled to part or all of a bonus for the current or last performance year will generally depend on the terms of the bonus scheme and/or relevant contract terms, also – quite often – whether they are a “good” or “bad” leaver. Regardless of the strict contractual position, a bonus payment may be considered within the scope of an overall termination package – e.g. a negotiating concession. In other circumstances, an employer might want to offer a retention or loyalty bonus to keep an employee and incentivise them to remain with the business.

You can ask us about drafting suitable wording into contracts, tailoring you a bonus scheme or paying a special “one off” bonus for retention purposes/on termination.