Bonuses

What are the different types of bonus?

Bonuses can be broadly categorized into:

• Contractual Bonuses
• Non-Contractual Bonuses

Each category has distinct characteristics and implications.

Contractual bonuses

Contractual bonuses are explicitly outlined in the employment contract or related documentation, specifying the conditions under which the bonus is payable. These conditions may include individual performance targets, company profitability thresholds, or other predefined criteria. When an employee meets these conditions, the employer is legally obligated to pay the bonus.

Entitlement to participate in bonus scheme

The employment contract should clearly state whether an employee is eligible to participate in a bonus scheme. This includes detailing any qualifying criteria, such as length of service, performance metrics, or departmental inclusion. Clarity in these terms helps prevent disputes and sets clear expectations.

Entitlement to a certain amount of bonus

When the contract specifies a formula or set amount for the workplace bonus, the employer must adhere to these terms. Failure to do so can result in a breach of contract, entitling the employee to seek legal remedies. It’s crucial for both parties to understand the exact terms to ensure compliance and avoid misunderstandings.

Non-contractual bonuses

Non-contractual bonuses are not explicitly stated in the employment contract and are typically awarded at the employer’s discretion. These bonuses can be influenced by various factors, including overall company performance, individual contributions, or other subjective criteria.

Discretionary bonuses

Discretionary bonuses are granted based on the employer’s judgment and are not guaranteed. However, even when a bonus is labelled as discretionary, employers must exercise their discretion fairly and reasonably. Decisions should not be made arbitrarily or capriciously, and consistent criteria should be applied to all eligible employees to avoid potential claims of unfair treatment or discrimination.

A mix of the two

Some bonus schemes incorporate both contractual and discretionary elements. For instance, an employee may have a contractual right to participate in a bonus scheme, but the amount awarded is determined at the employer’s discretion. In such cases, while participation is guaranteed, the payout may vary based on performance or other factors. Employers should ensure that the discretionary aspects are exercised in good faith and are not influenced by irrelevant or discriminatory considerations.

Custom and practice

Even in the absence of a written agreement, a bonus may become an implied term of employment through ‘custom and practice.’ If an employer consistently pays a bonus over several years, employees may reasonably expect this payment as part of their remuneration package. In such scenarios, withholding the bonus without valid reason could be challenged as a breach of the implied terms of the employment contract.

Deferred compensation – Restricted Stock Units

Deferred compensation plans, such as Restricted Stock Units (RSUs), are common in certain industries, particularly in the financial sector. RSUs are company shares granted to employees as part of their compensation package, which vest over a specified period or upon meeting certain performance criteria. This structure aims to align employees’ interests with the long-term success of the company. However, the complexity of such schemes necessitates clear communication and documentation to ensure employees understand the conditions and potential risks involved.

Bonus payments on termination of employment

The entitlement to a bonus upon termination of employment depends on the terms outlined in the employment contract and the timing of the termination. Some contracts may include ‘bad leaver’ provisions, denying bonuses to employees who resign or are dismissed for “cause” (as defined by the terms of the bonus scheme). Conversely, ‘good leaver’ provisions may allow for a pro-rata bonus payment if the employee leaves under certain conditions, such as redundancy or retirement. It’s essential for both employers and employees to understand these terms to manage expectations and avoid disputes.

Other factors that need to be considered are as follows

Gross misconduct

If your employer asserts that you are guilty of gross misconduct then it may argue that you are not entitled to the payment of an outstanding bonus (as, in this circumstance, your employer would argue that it is no longer bound by he terms of the contract of employment as a result of your gross misconduct, and the bonus therefore forfeited). There can therefore often be a dispute upon termination of employment as to whether an employee is guilty of gross misconduct or not.

An employee may be able to make a claim for a lost bonus if they are unfairly dismissed from their employment (for example, if they are subject to a procedurally unfair dismissal).

How bonus clauses are drafted

You will need to carefully check your contract of employment to see how the bonus clause is drafted, as quite often the bonus clause is drafted to prevent you from receiving a bonus if one of the following conditions apply:

• You are not employed on the date on which you would otherwise be entitled to receive a bonus;
• You are under notice of termination on the date on which you would otherwise be entitled to receive a bonus

This applies even if, for example, your employment terminates the day before a bonus would otherwise be due, or if you give (or receive) notice on the day before you would otherwise be entitled to be paid a bonus.

You should therefore normally aim to be careful about resigning from your employment if you are owed a bonus, and you should carefully check the bonus terms and dates on which you are entitled to receive a bonus.

PILON clause

If your employer does not have a contractual right to make a payment in lieu of notice, your employer will probably be in breach of contract if they try to terminate your employment and not pay you sums which you would otherwise be due during the notice period (such as, for example, bonus).

Banker bonuses

In the banking sector, bonuses often constitute a significant portion of total compensation. Regulatory frameworks, such as the removal of EU-imposed bonus caps, have influenced how banks structure these payments. For example, some banks have increased bonus ratios significantly, allowing senior bankers to earn multiples of their base salary in bonuses. These changes aim to align compensation with performance and risk management, but they also raise considerations regarding fairness and market competitiveness.

Bonus clawbacks

Bonus clawback provisions allow employers to reclaim bonuses under certain circumstances, such as misconduct, financial restatements, or failure to meet performance standards. These clauses are particularly prevalent in industries where long-term performance and ethical conduct are critical. Employers must clearly define the conditions under which clawbacks apply and ensure they are legally enforceable. Employees should be aware of these provisions to understand the potential risks associated with their bonus compensation.

Bonus entitlement whilst on maternity leave

During a period of maternity leave an employee is entitled to benefit from the contractual terms and conditions which would have applied should she have been at work, save in respect of terms relevant to remuneration (i.e. salary, wages, and other sums payable to her).

However, the Equality Act 2010 gives employees who have taken a period of maternity leave some protection in regards to their pay – under section 73(1) Equality Act 2010 a “maternity equality clause” is implied into a woman’s contract of employment, meaning that any contractual bonus that the woman would have received should she not have been on statutory maternity leave should be paid to her. This means that a woman becomes entitled to a contractual bonus for work that she undertook prior to her taking her period of maternity leave, and an employer cannot reduce the payment or delay payment. If an employer does fail to pay a bonus in these circumstances, or delays paying a bonus, the employee may have a claim for maternity leave discrimination.

In respect of a non-contractual bonus, a woman is generally not entitled to pay not regulated by her contract (such as, for example, a discretionary bonus), and not paying such a bonus will not amount to maternity discrimination.

Sex discrimination and equal pay claims

If a bonus scheme is discretionary then an employee may make a claim for sex discrimination under Equality Act 2010.

If a bonus scheme is contractual in nature then an employee may make an equal pay claim under Equality Act 2010 in respect of contractual rights.

Employers must be able to justify why employees have received particular bonuses, otherwise they may face a claim of sex discrimination, and the previous “culture of secrecy” that surrounded discretionary bonus payments has been stripped away by the expanding regulatory framework that surrounds bonus payments.

Making a claim if you’re not paid your bonus

If you’re not paid a bonus to which you’re entitled, whether partially or wholly, then you can make a claim in the Employment Tribunal for breach of contract and/or unlawful deduction of wages.

Breach of contract Tribunal claim

A claim can be made in the Employment Tribunal for breach of contract if you have not been paid a bonus, but only if the bonus payment was outstanding on termination of employment. There is also a £25,000 limit on the amount of damages that can be claimed in respect of a breach of contract claim in the Employment Tribunal. The normal time limits apply in respect of such a claim (i.e. the ACAS Early Conciliation process must be started no longer than three months less one day after the date on which the bonus was due to be paid or on which you were told that you were not going to receive it).

Unlawful deduction from wages Tribunal claim

You can also make a claim for unlawful deduction from wages in the Employment Tribunal, but this is generally only possible where you are able to define the bonus as “wages” (i.e. where the amount to be paid can be easily identified and calculated). A claim for a discretionary bonus would therefore be more likely to be brought as a breach of contract claim (whether in the Employment Tribunal or civil courts).

Claim in the civil courts

If your claim is worth more than £25,000, and the amount of the bonus is not easily determined, then you may need to make a claim in the civil courts (the County Court or High Court). There is a six-year time period (known as a “limitation date”) to do so.

Next steps

If you want to discuss an issue relating to a breach of a contract of employment then you can contact one of our specialist employment solicitors using the following details:

• By email: enquiries@redmans.co.uk
• By telephone: 020 3397 3603
• By requesting a callback