Employee bonus disputes

Fri 13 October 2023

Bonuses are widely used by employers in an effort to incentivise staff . Bonus and other reward schemes such as performance related pay often play a significant role in attracting senior individuals to certain organisations and help to cultivate a valued, loyal and motivated workforce.

One of the most common areas of dispute relates to whether a bonus is contractual or not. Employers usually want to ensure that bonus entitlements are genuinely discretionary in an effort to afford them some protection in the event of changing company performance.

The starting point is the wording of the employment contract or director service contract but this not necessarily the full story. A court can take into account the way in which bonuses have been dealt with in the past ie if bonuses have been paid every year in practice even if the contract states that entitlement is wholly at the employer's discretion, in deciding whether there is a contractual entitlement for the current year.

Bonus disputes

Discretionary bonus entitlements are often challenged by employees on the basis that they are not truly discretionary. There is case law where the Courts have found that non-contractual/discretionary bonus schemes in reality create contractual rights through custom and practice.. As a result, employers need to be careful and consistent in their approach to bonuses, and this starts with ensuring that relevant documentation is clear and well considered.

Generally speaking, to mitigate against bonus claim disputes, employers should :-

Ensure that it's made clear that the bonus is non-contractual
Reserve the right to vary or withdraw the terms of any bonus targets or bonus arrangement at any time without prior notice. Be clear about any performance targets or KPI's.
Bonus policies are clear that just because a bonus may have been paid in respect of one (financial) year, it does not entitle the employee to any bonus payments in respect of subsequent years.
Set out what will happen to any bonus entitlement following termination/notice of termination of employment e.g. will any such entitlement be forfeited altogether or pro rata’d up to the terminate date.
Include a clawback setting out the circumstances under which any bonus would be repayable. For example, if the employee were to leave their employment within a certain period.

Our employment lawyers are very experienced in drafting clauses in contracts, preparing bonus scheme policies or dealing with disputes arising over bonuses. Please do get in contact.