Types of bonus payments

Contractual bonuses

This is where an employee’s right to a bonus is written into the terms of an employment contract, usually with a specific formula for calculating the value of the bonus, based on set criteria. Contractual bonuses are often linked to individual performance (eg sales targets achieved) or the performance of the company.

Contractual bonuses create the most straightforward situation for an employee. They offer a transparent way of determining bonus entitlements and place a contractual obligation on an employer to pay the bonus according to the terms agreed.

If an employer does not pay a bonus in line with the terms of an employment contact, an employee is likely to have a clear case to bring a claim in the employment tribunal or civil courts.  If as a result of not being paid, an employee finds that they can no longer remain employed and decide to resign, the employee may have a claim for constructive dismissal against their employer.

Discretionary bonuses

It is common practice for employers to pay bonuses on a discretionary basis. This means that, although there may be a formula for how bonuses are calculated based on criteria, such as individual sales performance, it is up to the employer to decide whether to pay a bonus and what level to set the bonus at.

However, where the right to a bonus is at the discretion of the employer, the employer has a duty to exercise that discretion in good faith, with the decision based on reasonable grounds.

If an employee believes their employer has not acted in good faith and/or lacks reasonable grounds for refusing to pay a discretionary bonus to which they believe they are entitled, they may have a claim.

Long Term Incentive Plans

Long term incentive plans can be used by employers to give employees stocks or shares in a business when certain conditions have been met eg completing a set period of employment or achieving agreed performance goals. This is usually dealt with through restricted stock units (RSUs).

RSUs are a way an employer can grant company shares to employees. The grant is ‘restricted’ because it is subject to a vesting schedule, which can be based on length of employment or on performance goals, and because it is governed by other limits on transfers or sales that the company can impose.

Unlike stock options, RSUs always have some value to you, even when the stock price drops below the price on the grant date.

On the termination of employment, RSUs stop vesting. The only exception occurs in certain situations when vesting may be allowed to continue or may even be accelerated (eg death, disability, retirement and depending on the plan and grant agreement).

Failure by an employer to issue stocks or shares as agreed under the terms of a long-term incentive plan can be grounds for a claim. 

Maternity equality clauses

Where an employee has a contractual entitlement to a bonus, they have the right to be paid a bonus for any year in which they have taken statutory maternity leave. However, an employer will only be required to pay a bonus for the part of the relevant year where an employee was:

• at work (before and/or after the statutory maternity leave)
• on the standard 2 weeks of compulsory maternity leave

Where a bonus scheme is discretionary, an employer must act in good faith with regards to deciding the entitlement to any bonus for a bonus period where an employee was on maternity leave.

Common questions about bonus disputes

Can an employer change your bonus scheme?

If a bonus scheme forms part of a contact of employment, an employer will need an employee’s permission before making changes to the scheme. Should an employer attempt to change the terms of the scheme without an employee’s agreement, this could be grounds for a claim of constructive dismissal if an employee feels that they can no longer remain in their job as a result.

Can an employer withhold your bonus if they dismiss you?

This will depend on the circumstances. If the bonus scheme is contractual and an employee is dismissed for gross misconduct, an employer may be under no obligation to pay an employee any outstanding bonus. This is because the employee will be seen to be in breach of their contract of employment.  This may not be the case if an employee is dismissed with notice e.g. due to redundancy.

However, if an employee believes the dismissal was unfair, any bonus payments they have been denied could form part of a potential claim for loss of earnings as part of an unfair dismissal employment tribunal claim. 

Can an employer withhold a bonus if an employee resigns?

This will depend on the terms of the employment contract. If the contract states that an employee must be employed on the agreed bonus payment date, resigning before this date could mean that the employee loses the entitlement to a bonus for the relevant period. 

The material contained in this web page is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.