Bonuses: a decision-maker's guide

With growth in the UK economy sluggish and Brexit casting a long shadow over some sectors, some employees are destined to be disappointed with their lot. But how can HR and managers reduce the risk of disappointment leading to expensive litigation?

Check the contract

It's important to have a clear understanding of how much room for manoeuvre the business has. This requires careful analysis of the employment contract and any bonus scheme terms. Contracts often describe bonuses as discretionary but then set out the factors the business must take into account or even a calculation formula. In such cases, the employer's discretion is more limited.

One thorny area is what happens when the employee is under (or has given) notice or their employment has ended before the bonus is paid. Contracts often specify that the bonus is forfeited in these circumstances; if there isn't an express term to this effect, the business will often have an uphill struggle defending a breach of contract claim if it opts not to pay a bonus to a leaver.

But looking at the contract itself isn't the end of the story. You also need to consider what obligations the business is under beyond those written in the contract.

Incorporated terms

Communications to staff (e.g. announcements about the size of the bonus pool), side letters and separate bonus scheme terms may all have become incorporated into the contract of employment, depending on how they are phrased and the overall context. For this reason, it's important to ensure that any such communications are carefully drafted to avoid creating additional obligations for the business.

Implied terms

The employer's discretion may also be limited by implied terms. For example, a term may be implied into the contract through custom and practice (e.g. if there is a consistent history of paying bonuses according to a particular formula).

The business will also need to exercise any discretion in accordance with the implied term of mutual trust and confidence and within the limits that the courts have placed on the exercise of discretion in commercial contracts. Although this is an area of law which is developing rapidly, in summary these mean that a discretion over a bonus award must be exercised honestly and in good faith, for legitimate purposes and must not be exercised arbitrarily, capriciously or irrationally. HR can play a crucial role in ensuring that decisions based on performance are backed up by evidence, that decision-making is broadly consistent across the business and fits with the business' overall strategy.

Discrimination

Breach of contract claims are far from being the only risk. Bonus decisions are also a fertile source of discrimination and whistleblowing claims in the Employment Tribunal. Businesses must ensure that they do not discriminate in assessing performance or determining bonus awards – complicating factors such as disability-related absence and maternity leave must be treated with care. But unconscious bias can be just as problematic. To reduce the risk of discrimination claims, performance assessment should be as objective as possible and supported by high quality evidence. In larger businesses it may be helpful for a second manager to 'moderate' bonus decisions (or at least a random sample of them) to ensure that bonus decisions withstand scrutiny. HR can provide crucial oversight in this process: they may be best placed to spot discriminatory trends (e.g. female staff receiving lower bonuses across the business overall or in a particular division) and rectify them.