Employment Law – Bonuses
What are the different types of bonuses?
Bonuses can be contractual or discretionary, or sometimes a mix of the two.
The best contractual bonus to have is one that is “guaranteed”, but such bonuses are rare now. You will mainly find a guaranteed bonus where you start a new position and it is treated as a “golden handshake” to compensate you for the loss of bonus you are missing out on by leaving your last role before the bonus was paid. The guarantee would usually only be for the first year’s bonus entitlement.
You will also find a contractual bonus arrangments with reference to a set formula or target. If there is clarity in how the formula and objectives work when calculating the bonus, it is likely to minimise areas of dispute. Unfortunately though, disputes can still arise where targets have not been met, especially if an employer manipulates the level of work given to an employee so that a target becomes unattainable.
A discretionary bonus is one that gives your employer the final say as to whether you are eligible for a bonus and if so, what amount you should receive under the bonus scheme. Most discretionary bonuses schemes will provide that the discretion by your employer is based on either the performance of your work individually, as a team, the business as a whole-or a mixture of these. Many contracts of employment also provide for your employer to amend the scheme from time to time, but any changes must be made reasonably and in good faith.
It is now accepted that there is no such thing as an unfettered discretion on whether to pay a bonus 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. The decision must not be perverse or irrational. Accordingly if an employee meets the objectives set out in his bonus criteria, an employer must have reasonable grounds and justifcation for not paying it. An employer may find it difficult to establish such a reason if it is not clearly specified as being a relevant factor in the bonus clause.
What are my rights to a bonus if I resign or have been given notice?
Often, the question will arise whether payment of a discretionary bonus should still be made on termination of your employment – whether you have resigned or been dismissed. The big issue will turn on whether or not your are still employed as at the “bonus payment date”. This is because most contracts of employment will link your eligibility to qualify for payment based on whether you are still in employment at this date. One way for your employer to ensure you don’t meet this qualification is to make you redundant or dismiss you for poor performance at the same time as making you a payment in lieu of notice. This means you will not be employed as at the bonus payment date. The courts have generally upheld this as a valid reason for employers not to pay- as long as your contract states you must be employed at the bonus payment date to be eligible to receive the bonus.
If there is no right to pay in lieu of notice reserved by your employer however, the payment in lieu would amount to a breach of contract. In such circumstances, you may have a claim against your employer to recover all payments that you would have otherwise received during your notice period- including your bonus payment.
If you have been dismissed for gross misconduct, there will almost certainly be no requirement to pay outstanding bonuses, or even your notice, as you are dismissed summarily with no payments at all. You should note that,however, that if your employer has dismissed you unfairly for gross misconduct because they have not followed a correct process, you could potentially claim your loss of earnings arising from the unfair dismissal, which would include os salary payments as well as bonus.
What are my rights to claim a pro-rata bonus if I leave before the year end?
This will normally be governed by your contract of employment. Many contracts will state that you are not entitled to a pro-rata bonus if you leave without working the full year, or are not employed at the bonus payment date. Regardless of what your contract states, however, if it is your employers custom and practice to make a pro-rata bonus, then a strong argument can usually be made that your employer should be bound by such practice.
New legislation to cap European bankers’ bonuses took effect from 1 January 2014. The legislation will apply to bonuses paid in 2015 and 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 are currently considering “monthly allowances” for staff over a period of two to three years, which would replace variable bonuses. Others are considering an increase in fixed salary pay, or an award of shares not linked to performance to allow individuals to benefit from profits alongside shareholders.
The introduction of the bonus is cap is presently the subject of a legal challenge by the UK government, so the position could change by 2015.
Your settlement agreement should properly reflect your bonus situation, including in relation to deferred payments and your “good leaver” status.