Weekly dilemma: Christmas bonuses

I normally give my employees a Christmas bonus. However, this year business has been slow, and I’m thinking about not paying some, or even all, staff a bonus – would I be at risk of claims?

Employers that have had a difficult year will be in a similar situation with regard to Christmas bonuses. However, they will have to be cautious before implementing potential cost saving measures, otherwise they may find themselves defending costly employment tribunal claims.

When deciding whether or not to pay an employee a Christmas bonus, you should initially establish whether or not he or she has a contractual right to be paid a bonus and, if so, the nature of that right. If an employee’s contract states that he or she has a right to a Christmas bonus at a defined amount, you must comply with this term, or you will be in breach of the employee’s contract.

Top tips for employers considering withholding their Christmas bonus

• Speak to the workforce and explain why bonuses are not being paid, or are only being paid to certain staff.
• Review contracts to establish whether or not employees have a contractual right to a Christmas bonus.
• Understand that the payment of previous Christmas bonuses may provide the employee with a contractual entitlement to continue to receive one.
• Avoid refusing to pay a bonus capriciously or in bad faith, and always justify the reason for exercising discretion.
• Carefully consider how to avoid discriminatory practices if paying bonuses to some employees and not others.

If an employee’s contract entitles him or her to a Christmas bonus but payable only at your discretion, or if the amount is discretionary, then there is greater scope for avoiding or reducing the payment. There may be sound economic reasons for not paying a bonus to some staff, but you should ensure that you do not exercise any discretionary right capriciously or in bad faith. Consistency across all staff is key, and you should make your reasons for not paying a bonus clear to avoid any allegations of discriminatory treatment.

However, even if an employee’s contract does not give him or her a right to a Christmas bonus or the right is purely discretionary, you may still face an argument from the employee that there is an implied contractual right to a bonus payment. This would normally be due to any established custom and practice of receiving annual bonuses and, therefore, a reasonable expectation that the employee will receive one this year.

If the payment of a Christmas bonus is contractual, in addition to a breach of contract claim, an employee can choose to resign due to the non-payment of a bonus and claim constructive dismissal for an alleged breach of contract and of mutual trust and confidence. The risk of this happening is likely to be dependent on the size of the bonus and the current economic climate.

Finally, if you choose to withhold or reduce Christmas bonuses, or pay them indiscriminately, you may face an equal pay or a discrimination claim under the Equality Act 2010. This is a particular concern to employers given the uncapped nature of discrimination awards.

You should speak with your employees and fully explain why bonuses are not being paid, or are only being paid to some employees this year. By doing this, you can build a strong and open relationship with your employees to help tackle the current trading difficulties together.

Jon Keeble, employment partner, DWF