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Employment Contract – Bonus clause

It has been accepted, considering the various cases in the past, that there is nothing like unfettered discretion by an employer with regards to the payment of bonuses. A myriad of decisions in the court have decided that employers should exercise discretion on good grounds.

Therefore, if an employee meets a criteria for a bonus, there must be a valid reason for not paying that bonus, in order to show that discretion has been exercised in good faith. An employer cannot make such a decision based on a personal opinion of an employee.

Contractual bonuses

This one is the clearest position whereby the bonus is expressed in the contract and based on a specific formula. For instance, it might be linked to the performance of an individual and the targets being achieved. It may also be based on the company’s performance as a whole.

In such a contract, there is no room for the employer to fabricate the circumstances. If an employee is serving their notice period, he will still be liable to receive a bonus, provided he has completed a year of service within the organisation. A failure to follow such terms in the contract can lead to a breach of contract claim or constructive dismissal.

The bonus scheme on the other hand may also be a mix of a discretionary element which is built into a contract, giving the employee a right to participate in the bonus scheme.

Custom and practice

An employer may sometimes find it difficult to withhold paying a bonus amount if the same has been a practice and has been regularly paid over a period of time. In such situations, it is suggested to make a payment of the bonus as an implied term in the contract of employment.

Deferred compensation

Sometimes the employer may implement a long term incentive plan which is mostly in the form of restricted stock units. This is seen often in banking contracts. An RSU is a legal agreement to issue stocks or shares of the company at the time of award distribution. The award is vested when certain conditions are fulfilled, such as a period of time, length of employment, targets or certain performance criteria. At every time of the vesting date, you would receive stock equal to the value of RSU vested.

It is important to note that if you are disciplined for a gross misconduct, you may have to forgo your deferred compensation.

Bonus payments on termination of employment

This is a crucial situation. When the time of termination comes, there are certain factors that must be considered whilst deciding whether to pay a discretionary bonus or not. Here are some of those factors:

1. Gross misconduct

In case of dismissal for a gross misconduct, there will most certainly be no payment of outstanding bonuses. The employee in such a case is deemed to be in a breach of contract and hence will be dismissed summarily. Hence, any bonuses that you may have earned will be forfeited. It should be remembered though, if the dismissal is an unfair one, a potential claim can still be made for loss of earnings arising from unfair dismissal and that could also include entitlement to bonuses earned.

2. Bonus clauses

You will obviously be expecting to receive a bonus if you have worked the entire year. But the problem is, every organisation has a bonus clause, most of which may state that:

  • You must be employed at the bonus payment date
  • You must not be serving notice period.

So, in case you resign by giving your notice before the date of bonus payment, you may not be eligible to receive a bonus for that year.

In case the employer has given you notice, such as in the case of redundancy, there can be three possible scenarios:

1. You will be allowed to work your notice period
2. You may be placed on ‘garden leave’ – away from workplace, still paid
3. Your employer may choose to pay you in lieu of your entitlement to notice. In this case, you will certainly not be employed on the bonus payment date and hence will not be entitled to receive any bonus for that year.

If your employer has failed to bring to your attention the fact that you must be working and not under notice to receive any bonus payments for the year you are entitled to, or if there is a policy regarding bonus that has not been shared with you, then your employer cannot withhold a bonus payment which he is paying to other employees.

Having said that, any settlement agreement that you enter into with your employer at the time of termination of your employment should reflect your bonus situation.

Bonuses while on maternity

If you are working under contractual bonus entitlement, a maternity equality clause has to be inferred into your contract. This entitles you to receive a bonus for the year you have taken as statutory maternity leave. However, you will be paid only for the part of the year you were working.

  • The duration which you were at work before going on maternity leave
  • Two weeks of compulsory maternity leave
  • The duration you worked for after your maternity leave

In the situations when the bonus is expressed to be discretionary, your employer must ensure that he exercises discretion in good faith and should not treat employees who are on maternity leave any differently than the rest of the staff.

If your employment terms do not have any bonus clause but the employer pays a bonus to other staff, the law suggests that you should also be considered for bonus payment.

Making a claim for non-payment of a bonus

For a non-payment of any bonus you are eligible for, you can make a claim in the employment tribunal. You can issue a claim for unlawful deduction from wages and the process needs to be started within 3 months of the date the bonus was due.

Our Employment Law Specialists can assist with all types of claims. Naturally, we pride ourselves on providing the best possible service to the highest standards, we can provide free employment law advice on all problems.

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