In the past, we have paid Christmas bonuses to our employees. We are not sure whether we want to pay bonuses at all this year. Do we have to?
If you have habitually paid employees a Christmas bonus, they may argue they have a legitimate expectation of that bonus, and, therefore, are entitled to receive it. In effect, through custom and practice, the payment of a Christmas bonus may have acquired contractual status.
Consequently, failure to pay it would amount to a breach of contract.
If an employee’s contract provides for a bonus to be paid at the discretion of the company, you need to be extremely careful about how that discretion is exercised. The phrase “discretionary bonus” does not give an employer the right to make any decision it pleases and simply put that decision down to an exercise of discretion.
To avoid falling foul of recent case law, an exercise of discretion – both in relation to whether a bonus should be awarded and how much that bonus should be – must be reasonable. An arbitrary and capricious decision not to award a bonus will be held to amount to a breach of the duty of mutual trust and confidence and a breach of contract.
Ultimately, whether or not you are obliged to pay a bonus in circumstances where an employee’s contract refers to a “discretionary bonus” will depend on the wording of the relevant clauses. Some bonuses – although expressed to be discretionary – refer to the criteria or targets that will be considered in determining whether an award is to be made. There is a risk that, depending on the drafting of the relevant clause, an employee achieving these targets will have a legitimate expectation that a bonus will be paid. Consequently, any decision not to pay a bonus, or to pay a bonus below that which the employee might reasonably expect, would need to be very carefully justified.
In awarding bonuses, you must consider all employees, including those who are absent on sick leave and maternity leave. If you don’t, you may face potential tribunal claims on the grounds of disability or sex discrimination. Cautious employers often pay such bonuses in full.
Sarah Ward is a solicitor at Magrath & Co