Bonus schemes must be well drafted, transparent and fair

An employer will firstly need to decide the terms of the bonus scheme and set these out clearly. It might be that they wish to set out all the parameters in writing: how much an employee is entitled to receive; when it will be paid; and what targets need to be met before a bonus becomes payable.

Another option is to state that the bonus scheme is discretionary, which allows the employer to decide if a bonus is payable and, if so, how much it will be. Employers that operate a discretionary scheme need to be aware that they are obliged to act in good faith and not exercise their discretion in an irrational way. Otherwise, they might find themselves facing breach of contract or constructive dismissal claims.

In practice, a bonus scheme is often a combination of these two models, with some details written in a contractual document but with discretion being reserved as to how much is ultimately awarded.

Whatever the mechanism, employers will want to ensure that the terms are certain and precise. Promises made verbally can be just as binding as written terms, although it is often harder to prove exactly what was said and disputes over meaning can arise. It might therefore be helpful for the employer to state that oral representations are not binding.

Implied right to bonus

Where a bonus scheme is in place for some time and the employer habitually runs it in the same manner or the same amount is always paid out to the individual, that custom and practice can give rise to an implied right to the bonus. This is something that employers should be mindful of once their bonus scheme is up and running. It can be helpful to add a provision making it clear that a bonus awarded in one year should not give rise to any expectation of a bonus being awarded in subsequent years.

An employer may seek to make a bonus repayable in certain situations, for example if the employee leaves their employment before a specified date. These provisions are particularly common in the financial sector and in listed companies but could equally be considered by property businesses.

However, employers must think carefully when drafting such clawback provisions as they could be challenged as a penalty or a restraint of trade. In other words, they could be charged for unreasonably restricting the employee from leaving their employment and moving on. If such a challenge were successful, the clawback provision might fail.

Care should be taken not to discriminate against individuals when operating a bonus scheme. For example, part-time and fixed-term employees are often overlooked for bonuses, which can be unlawful, and not awarding a bonus to an employee who is on maternity leave could potentially be discriminatory.

When writing a bonus scheme, clearly set out the terms – for example performance targets, payment triggers, formula to calculate the bonus, whether discretion is reserved by the employer and maximum and minimum amounts.

Make it clear that any bonus will be pro-rated if the employee is not employed for the entire bonus period, such as in their year of joining.

Also, consider stating that the employee must be in employment, not under notice of termination, on the payment date in order to qualify or whether ‘good’ and ‘bad’ leaver provisions will apply. For example, the employee could still receive a bonus if they are made redundant but not if they are dismissed for gross misconduct.

While bonuses can be an effective tool to motivate staff, thereby improving productivity, job satisfaction and retention rates, great care must be taken to ensure that a bonus scheme is well drafted, transparent and fair. If not, the introduction of such a scheme could backfire, leading to disputes from disgruntled employees.

Katee Dias is senior associate at Goodman Derrick