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Employment Law- Bonuses


Discretionary Bonuses

The issue of employers unfairly exercising their discretion by reducing the level of a bonuses is a common cause of conflict by employees, and one that leads to many disputes.

Most bonus schemes are expressed to be discretionary. Such schemes will usually include a form of criteria (such as the achievement of individual, team or company targets) for determining the amount of the bonus, but will always reserve to the employer the right to decide whether those payments are actually made.

It is now accepted by a string of cases that there is no such thing as an unfettered discretion by an employer. 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 meets his bonus criteria, an employer must have reasonable grounds for not paying that bonus if it is to show that it has exercised its discretion in good faith. A decision cannot be made, for example, based on the personal dislike of an employee. An employer may similarly find it difficult to establish such a reason if it has not been communicated to staff beforehand within the bonus documentation.

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).

Contractual bonuses

The clearest position for all parties is where the bonus is expressed to be “contractual” and based on a specific formula. For example, it may be linked to individual performances and targets achieved, or the company performance as a whole. There is little room for manoeuvre by an employer in these circumstances, even if the employee is 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

More commonly, the bonus scheme may be a mix of the two, with a discretionary element built into a contractual right to participate in a bonus scheme.

Custom and practice

An employer may similarly find it difficult to withhold paying a bonus if it has by custom and practice, regularly paid previous bonuses to employees who have similarly performed over the year. In these circumstances, an implied term to make payment of a bonus could be incorporated into the contract of employment.

Deferred compensation- restricted stock units

Your employer may implement a “Long Term Incentive Plan”, which is often in the form of restricted stock units (“RSU’s), especially 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 the required period of time, length of employment or performance criteria. 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% 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.

If you are disciplined for gross misconduct, or you breach your restrictive covenants, you are likely to be forced to forgo your deferred compensation.

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.

Gross misconduct

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.

Bonus clauses

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). 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 will 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 have regularly used a PILON payment to fast track employees out of the business just to avoid having to make a bonus payment. This is quite common in the banking industry, which is why you see many redundancies taking place at the end of a calendar year.

Where your employer cannot rely on a contractual PILON clause to avoid a bonus payment and you end up working your notice or placed 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.

In one of the benchmark cases (Noble Enterprises), an employer claimed that their employee was not entitled to a bonus in respect of the previous year when he resigned and left just a few days short of the bonus payment date. The Employment Appeals Tribunal  found that the bonus scheme (which was not recorded in writing), was imprecise. In particular, the provision which purportedly barred the employee from being paid his bonus had not been made clear. It was assumed by the EAT that had he been aware that he needed to remain in employment until the bonus payment date, the employee would not have left until after that date.

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 employers breach. You would be entitled to seek recovery of the sums you would otherwise have received during your notice period – which would include a bonus payment.

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.

Bankers Bonuses

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.

We are a leading firm of employment law solicitors, acting for employees and senior executives in the City and throughout the UK. For more information on bonuses and a free consultation, please get in contact on 020 7100 5256 and ask to speak to Philip Landau or any member of the employment team, or email us.


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