Weekly dilemma: Paying bonuses when staff leave

One of our employees has left, having worked continuously during 2005. She had a package which included an annual bonus. We believe the bonus is not payable because the terms specify that staff under notice or leaving before the end of December forfeit their bonus. The employee says she was not given the bonus terms and that they were not published internally and were not common knowledge. Have we committed an unlawful deduction of wages or breach of contract?

The answer to whether there has been an unlawful deduction or a breach of contract will be the same. You may be at fault, but this will depend entirely on the language of the contract. If it says “you are entitled to participate in the company’s annual bonus plan, subject to its terms from time to time in force”, then although the contract seeks to incorporate bonus plan terms, like any other contract, it can only do so validly if your ex-member of staff has had notice of those terms.

If the terms have not been properly disseminated, a court might be prepared to imply a right to the bonus for staff that leave during the bonus year and order payment. Custom and practice arguments would be relevant.

On the other hand, language like “you may be entitled to an award of an annual bonus, but any award shall be entirely within the company’s discretion” is unlikely to create a liability, as long as the company has acted consistently. This is because, legally, you simply have to show that your company exercises its discretion in a way which is not irrational or in bad faith. You can legitimately say that the “internal terms” are there to guide managers to award bonuses consistently and to exercise discretion fairly.

The practical answer is to investigate the precise language of the bonus terms and whether it was effectively communicated. Consider also whether the policy of not paying leavers has been consistently applied. Armed with this information, invite your former employee to a meeting to discuss her complaint, and follow the other requirements of the statutory grievance procedure. Resist giving way unless specific legal advice on the terms gives a very poor prospect of success.

Jennie Wade, employment lawyer, Hempsons

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