Employment Law- Bonuses
WHAT ARE THE DIFFERENT TYPES OF BONUSES?
These are usually:-
- Discretionary bonuses;
- Contractual bonuses;
- A mix of the two;
What is a Discretionary Bonus?
Most bonus schemes are expressed to be discretionary. This means that bonus entitlements are not contractual and the requirements for awarding a bonus are flexible.
Such schemes will usually include criteria, such as reaching individual, team or company wide targets for determining the amount of the bonus. Your employer will always reserve the right to determine the extent of those payments or indeed whether a bonus is paid at all. This is a common source of conflict between employers and employees.
It is now accepted that there is no such thing as an “unfettered discretion” for an employer when considering what bonus payments to make. Various decisions by the courts in recent years have determined that an employer must exercise its discretion in good faith and on reasonable grounds. It follows therefore that if an employee satisfies the bonus criteria, the employer in turn, must have reasonable grounds for not paying that bonus if it is to show that it has acted in good faith. A decision cannot be made, for example, based on a personal dislike of an employee.
An employer may similarly find it difficult to establish reasonable grounds if these have not been communicated to staff beforehand, for example within the bonus documentation. Your employer’s failure here could give rise to a legal claim.
If you are not happy with your discretionary bonus payment, you should speak to your line manager about this in the first instance, and ask for information how the bonus was determined. You can always lodge an internal grievance if you are still not happy (or seek legal advice first).
What is a Contractual Bonus?
This is the clearest position for all parties, where a bonus is expressed to be “contractual” and based on a specific formula. For example, it may be linked to an individual performance and targets, or the company performance as a whole. There is little room for manoeuvre by an employer where you have a specific contractual bonus, even where you may be under notice before the bonus payment is made (assuming the full year has been worked). A failure to adhere to the contractual arrangements could give rise to a breach of contract claim and/or constructive dismissal.
A mix of the two
The bonus scheme may be a mix of the above two, with a discretionary element as to the amount of the bonus working alongside a contractual right to participate in a bonus scheme.
Custom and practice
Regardless of what type of bonus clause you have, your employer may find it difficult to withhold a bonus if it has by custom and practice, regularly paid previous bonuses to employees who have performed to a similar standard each year. In these circumstances, an implied term obligating your employer to pay a bonus could be deemed to have been incorporated into your contract of employment.
Deferred compensation- restricted stock units
An employer may implement a “Long Term Incentive Plan”, which is often in the form of restricted stock units (“RSU’s). This is particularly common in banking contracts.
An RSU is an agreement to issue stock or shares at the time the award vests. An award will usually vest when certain conditions have been met, including after the required period of time has passed, length of employment accrued or performance criteria having been satisfied. There will be a vesting schedule setting out when and to what extent the RSU’s will vest, which is usually on yearly anniversaries of the award date (for example, 20% per year over 5 years). In some cases, even after stock bonuses have vested, you may be also required to retain a percentage of your restricted stock units for a further period.
At each vesting date, you will receive stock equal to the net value of the RSU’s which have vested. Employers use units instead of the actual restricted stock or shares, because they can postpone shareholder dilution until the time of vesting; get more consistent tax treatment; and even if the share price falls after the award date, the RSU still retains some value- unlike a market value share option. Sometimes, you may receive a cash equivalent to the shares.
Bonus payments on termination of employment
Often, the question arises whether payment of a discretionary bonus should still be made on termination of employment – whether the employee has resigned, or has been dismissed. There are certain factors that need to be considered here.
If you have been dismissed for gross misconduct, there will almost certainly be no requirement to pay outstanding bonuses. In cases of gross misconduct, an employee is deemed to be in breach of contract and will usually be dismissed summarily. Accordingly, any bonuses, which have been earned, but not paid, will be forfeited. It is worth noting, however, that if the dismissal is unfair on procedural grounds (even though an employer has labeled it “gross misconduct”), a potential claim for loss of earnings arising from the unfair dismissal can still be made, and this could include a lost entitlement to a bonus.
You will doubtless expect to receive your bonus if you have worked a full year. You may also have an expectation of receiving a pro-rata bonus payment if you leave employment before the year end. The problem for many employees is that to be eligible for a payment, most bonus clauses state that;
- you need to be employed at the bonus payment date and/or;
- you must not be working under notice.
If, therefore, you resign by giving notice before the bonus payment date, you may not be eligible to receive a bonus for that year even though you are still working at th etime the payment is usually made.
Where it is your employer who has given you notice (for example by reason of redundancy), there will be 3 alternative scenarios:-
(1) you will be allowed to work your notice period;
(2) you will be placed on garden leave;
(3) your employer may elect to pay you in lieu of your contractual entitlement to notice (in other words, you will not need to work your notice and your employer is bringing forward your termination date instead, paying your notice as a lump sum). This is commonly known as “PILON” -i.e. a payment in lieu of notice.
If your employer decides to make a payment in lieu of notice, you almost certainly will not be employed at the bonus payment date and may therefore not be entitled to receive a bonus for that year. This is unless your contract of employment specifically provides for a pro-rata bonus to be paid if you even if leave part of the way through the year (although this is rare).
In fact, some employers regularly use PILON payments to fast track employees out of the business just to avoid having to pay a bonus. This is quite common in the banking industry, which is why many redundancies take place shortly before the bonus payment date.
The courts often disapprove of this approach on the basis that it breaches an employer’s duty of reasonableness towards employees. If it’s found that the decision to terminate employment was unlawful and/or that your employment was terminated in such a way to avoid having to pay out a bonus, which was irrational or perverse, then you can still claim the lost bonus as part of your loss of earnings,
Where your employer cannot rely on a contractual PILON clause to avoid a bonus payment and you end up working your notice or you are on garden leave at the bonus payment date, the courts have come down on the side of employees. Employers have been compelled to honour the bonus payment in these circumstances, where those bonuses are also being paid to other remaining members of staff.
If your employer has not brought to your attention the fact that you need to be working and not “under notice” to receive a bonus, or if there is a policy in place that has also not been brought to your attention- then your employer will have difficulty in withholding a bonus payment which is being paid to other staff.
No PILON clause
If your employer has not reserved a contractual right to pay you in lieu of notice, the PILON would almost certainly amount to a breach of contract. In such circumstances, you could issue proceedings based on your employer’s breach. You could seek to recover the sums you would otherwise have received during your notice period – which would include a bonus payment.
How easy is it for your employer to deduct a discretionary bonus already paid on termination of your employment?
Where a non-contractual bonus has already been paid to you, it is treated as “wages” under the Employment Rights Act, and due and payable on the date payment is made. In fact, this definition of wages also applies where your employer has exercised its discretion and awarded/declared a bonus (even if it has not yet been paid).
Promise of a bonus
In May 2012, Commerzbank in a landmark case case lost a claim brought by a large group of bankers who were promised a bonus pool of 400m EUR in 2008. Such promise was made by Dresdner Kleinwort to help retain their staff before it was sold to Commerzbank a few months later. In the end, only a tenth of that bonus was paid. Although the case turned on the particular contractual obligations of Commerzbank to their staff, the court ruling could mean that more bankers will have the right to sue for similar promised bonuses- whether informally made or otherwise.
New legislation to cap European bankers’ bonuses has taken effect from 1 January 2017. The legislation applies to all ‘Code Staff’ (i.e. those identified as senior managers or those performing significant influence functions).
The cap prevents bonuses of more than 100% of your salary being paid out, although this can rise to 200% of your salary with shareholder approval. A minimum of 25% of any bonus exceeding 1 x salary must be deferred for at least five years in the form of long-term deferred instruments (LTDI’s)
To get around the cap, some banks have tried to pay “monthly allowances” for staff over a period of two to three years, which would replace variable bonuses, however this has been ruled as unlawful by the European Banking Authority. Other banks have significantly increased the fixed salary pay, or awards of shares not linked to performance to allow individuals to benefit from profits alongside shareholders.
Any settlement agreement you enter into at the termination of your employment should properly reflect your bonus situation, including in relation to deferred compensation payments and your “good leaver” status.
Bonuses whilst on maternity
If you have a contractual bonus entitlement, a ‘maternity equality clause’ is inferred into your contract. This entitles you to be paid a bonus where you have taken statutory maternity leave during the bonus year. However, the requirement is to only pay you for the relevant part of the bonus year:
- during which you were at work before going on maternity leave;
- during which you were absent for the 2 weeks’ compulsory maternity leave; and/or
- during which you were at work after your return from statutory maternity leave.
Where the bonus is expressed to be discretionary, your employer should exercise its discretion in good faith and not perversely -in the same way as they need to for employees who are not on maternity leave. If you have made a contribution to work for the above periods or whilst on maternity leave, then you should also be considered in the calculation of bonuses.
If there are no bonus clauses whatsoever in your contract of employment, and your employer nevertheless decides to make payments to other staff, then the law suggests that you should also be considered for a bonus. This would be on a pro- rata basis for the actual periods that you have worked.
Making a claim for non-payment of a bonus
You can make a claim in the employment tribunal for non–payment of a bonus. The quickest way of doing this would be to issue a claim for an unlawful deduction from wages. The process would need to be started by the claim being lodged with ACAS no later than 3 months less one day from the day that the bonus became due to be paid, or when you were told that you were not going to receive it. The lodging of a grievance does not extend this time.
A claim for the unlawful deduction from wages can generally only be made where amount is ascertainable and easily quantifiable, for example, through set performance targets and achievements. If you are claiming a bonus that is entirely discretionary in nature and one that cannot easily be referred back to a set formula, then such a claim would need to be one of “damages for breach of contract” instead, which is a different type of claim.
An employment tribunal has jurisdiction to consider such a breach of contract claims only if you are making the claim for not more than £25,000 -otherwise the claim would need to be made in the County Court or the High Court, and there is a 6 year time period to do so.