BONUSES AND PAY : A GUIDE ON HOW TO MANAGE BONUSES AND PAY IN LIGHT OF COVID-19

Bonuses are a great tool to motivate and reward talented workers. However, given the current climate, you may find it difficult to finance bonuses in addition to wages. To avoid tension between you and your employees, it is advisable you are aware of your company's contractual arrangements on matters of

pay and bonuses.

CONTRACTUAL AND DISCRETIONARY BONUSES

The ability to withhold bonus payment will depend on whether the employee has a contractual right to receive payment. Such right arises either from an express term in the contract of employment requiring the employee to be paid a bonus or by virtue of custom and practice.

Employers may implement a discretionary bonus scheme to avoid certain contractual obligations. This provides employers with flexibility in determining the extent of a bonus scheme. Although discretionary in nature, it comes with its limitations which you should be aware of so you avoid breach of contract.

In Clark v Nomura International PLC [2000] IRLR 766 HC, it was ruled that employers must not act perversely and arbitrarily when fixing a bonus under their discretion. Failing to do so in this case lead to the employee receiving £1.3 million in damages. Employers must also ensure to not act in a way that will destroy the relationship of trust and confidence.

IS THERE A DUTY FOR THE EMPLOYER TO COOPERATE DUE TO COVID-19?

With an increase of furloughed employees, it is likely many will argue they have been deprived of the opportunity to show their worth as a result of Covid-19; therefore arguing that they should not be denied bonus.

Takacs v Barclays Services Jersey Limited [2006] IRLR 877 sets out a duty for an employer to cooperate, to enable an employee to receive bonus payment. In this case, when the employer dismissed the employee and denied its bonus right, this was held a breach as the employer should have cooperated with the employee so it can reach its targets and obtain bonus.

If you are thinking about dismissing a furloughed employee because of current events, reach out to our team and we can help you make the right decisions to avoid breach of contract.

EMPLOYER CONSIDERATIONS :

CAN YOU REMOVE A SCHEME TO AVOID PAYMENT?

You will only have such right if there is a clause within the contract of employment clearly reserving your right to remove a scheme.

In Khatri v Cooperatieve Centrale Raiffeisen – Boerenleenbank BA [2010] IRLR 715, the contract was construed differently to what the employer intended. The court found that the right to remove only related to future years and not the current bonus year that the employees were working towards.

CAN PAYMENT IN LIEU OF NOTICE ("PILON") CLAUSE BE USED TO AVOID BONUS PAYMENTS?

A PILON clause will allow immediate termination of the contract of employment. An employee will receive a lump sum instead of having to serve its contractual notice period. A well-drafted PILON clause may only include basic salary to pay. If the clause is silent on matter of bonus, this is likely to result in employees claiming bonus entitlements. To avoid this, it is advisable you make it clear how payment is calculated in the employment contract.

SITUATIONS THAT MAY GIVE RISE TO BONUS PAYMENTS

With Covid-19 creating a similar economic downfall to the 2008 financial crisis, employers should avoid making unequivocal statements which may show intention to create legal relations. For example, guaranteeing bonus payments to prevent staff departure in speculation of sale of company. This was the case in Attrill v Dresdner Kleiwort Ltd [2013] IRLR 548

In addition, where custom and practice infer a contractual right to pay, you may find it difficult to deny bonus payment.

DISCRIMINATION AND BONUSES

It is imperative you avoid discrimination when considering bonuses. You should especially be

cautious of those on maternity leave, disabled and atypical workers.

A woman cannot be deprived of bonus that relates to the period of work before and after her maternity leave or during compulsory leave, where the employment contract requires payment.

Refusing to pay in these circumstances may be indirectly discriminatory against female employees, as women usually take maternity leave.

A discretionary bonus scheme that denies entitlement to a disabled worker may lead to a breach of s.15 Equality Act 2010. There was such a breach in Land Registry v Houghton [2015] UKEAT/0149/14/BA as the denial of bonus entitlement following disability-related absences was held to be an unfavourable treatment arising because of the employee's disabilities.

Similar considerations should be made in relation to atypical workers. Fixed-term and part-time workers are entitled to receive bonuses on a pro rata basis. Operating on this basis will prevent potential claims. Further, whether an agency worker is eligible will depend on the nature of the bonus.

Please do not hesitate to contact us if you have any queries on bonuses and pay matters: our team is at hands to help you make the right decisions.