Bonuses and Settlement Agreements

By Lauren Hiller – Employment Solicitor at Slater & Gordon Solicitors.

If a significant part of your earnings comes in the form of a bonus, then this is going to be an important point to consider in any settlement agreement.  It can be a key issue with regard to the timing of a departure; employers often dismiss employees just before bonus time so as to deprive them of the payment, and a resigning employee will want to wait until the money is in the bank before they hand in their notice.   Bonus entitlement is a complex area and it may well be necessary to take legal advice, but this note will take you through some of the key questions to consider.  

 Documentation

The first step is to look at all the bonus documentation.  This may include;

·         Your employment contract

·         Your offer letter

·         A staff handbook

·         A separate bonus scheme document

·         Any correspondence from your employer about your bonus entitlement

 Contractual or discretionary?

The first question to ask is whether the bonus scheme is guaranteed under contract or is at the discretion of your employer.  Look carefully at the wording in the bonus documentation to see how much room for manoeuvre your employer has given itself.   It is very common to see a mixture of both contractual and discretionary elements; for example you may have a contractual right to take part in a bonus scheme, but your employer retains discretion as to the amount it awards.

If the bonus is contractual, then in theory it should be possible to calculate your bonus according to any formula or targets set.  However, in practice there can still be disputes, even when the targets seems to be objective.  If you have a financial target, your employer might artificially manipulate this e.g. by putting work through a different department.  And when it comes to more subjective criteria such as “interpersonal skills” or similar, these are often very vague and open to interpretation, effectively allowing an employer an element of discretion.  You should review the structure of your bonus scheme to look for any areas that could give rise to debate, and prepare your arguments to show why you have met any targets.

If the bonus is entirely discretionary, or contains elements of discretion, then you might think that you cannot challenge your employer’s decision.  However, it is an implied term of any bonus scheme that an employer cannot exercise its discretion in a way that is irrational, perverse, or in bad faith, so you may be able to challenge any decision on that basis.  It’s worth noting that zero bonuses are usually easier to challenge on that basis than low bonuses.

Important questions to ask yourself include: what bonus have you received in past years? What have others received this year? How are leavers usually treated?  What is standard practice within your industry sector?  Sometimes it is possible to argue that a bonus scheme was such a regular and important part of the employment relationship that a contractual obligation is implied “by custom and practice”.  Even if you cannot get that far, this information might help a court decide that a decision to award a low or nil bonus was an irrational exercise of discretion.  Any correspondence or verbal communications that gave you an expectation that you would receive your bonus will also be relevant.

Has notice been served?

An important point to look for is a provision in the scheme that allows your employer to withhold your bonus if your employment has been terminated, or you are under notice, on the date when the payment is due.  So the timing of your resignation, or of your employer serving notice, can be crucial.  Even if your bonus is otherwise guaranteed under the contract, if this sort of clause is included in the contract it can make it very difficult to claim your bonus.

If there is not a clause allowing your employer to withhold a bonus if notice has been served, then they might try to get around this by dismissing you without notice.  In this instance, you should check your employment contract for a payment in lieu of notice clause.  If your employment has not explicitly reserved the right to pay you in lieu of notice, and to only pay you basic salary in respect of the notice period, then you could have a claim to any bonus you would have expected to receive in the notice period.

Even if there is nothing in the documents that says no bonus is due if notice has been served, it’s worth looking at the bonus documents to see if they say anything about the purpose behind the bonus scheme.  If it mentions something about incentivising future performance, then your employer could use that as an argument that it is a reasonable exercise of its discretion not to award any bonus to an employee who is already leaving the company.  

Are you a good leaver?

Sometimes an employer will award a bonus but then defer payment for a certain period of time.  Commonly stock options are awarded instead of or additional to cash, and the dates when these options vest may be staggered over a number of years.  If your employment ends before you receive it, then payment or vesting of options are likely to be conditional on the circumstances under which your employment is terminated.  Usually, if an employee retires at a certain age or for health reasons, or if they are made redundant, they will be a “good leaver” and get to keep their bonus.  If they resign, or are sacked for poor performance or misconduct, then they might lose their bonus.  Sometimes, whatever the reason for termination, if they then go and work for a competitor, they lose their deferred bonus.  Even in otherwise water-tight contractual bonuses, it’s common for an employer to say that it can withhold bonus if there is gross misconduct.

You can see how that immediately leaves room for argument; your employer may give a reason for dismissal which you do not accept.  In that case, your negotiating position would depend on how likely you are to be able to successfully challenge the fairness of the dismissal for the purported reason.  Alternatively, you may argue that you aren’t competing – or alternatively, consider it unfair that you should lose a bonus you have earned simply because you have no choice but to go out and get a job at a competitor when you leave.  If your bonus is valuable then you may feel you have no choice but to take a different career path and join a client instead, in order to avoid losing a retained bonus.  All of this should be something you think about when you join rather than just when you leave.

Potential claims

If you are negotiating a settlement agreement, then you are doing so to avoid the need to bring any legal claims.  But it’s important to understand the value of any claims you might have, and the strengths and weaknesses of those claims, to understand your negotiating position.  Potential claims include:

Breach of contract or a deduction from wages claim – if you have a contractual entitlement to your bonus then you may be able to bring a breach of contract claim in the high court or county court, or a claim for unlawful deductions from wages in the employment tribunal

Wrongful dismissal – if you have been dismissed without the proper notice, which caused you to miss out on your bonus, you may be able to bring a claim for the earnings you would have received during your notice period.  

Unfair dismissal – if you were dismissed without a fair reason, or without your employer having followed a fair procedure, then you may be able to bring a claim for unfair dismissal that would compensate you for lost earnings, potentially including bonus.  However, it’s important to note that usually only employees with at least two years’ service can bring an unfair dismissal claim, and that damages are capped at a maximum of £74,200.  

Discrimination –  if you think that your sex, race, age, disability, sexual orientation or religion have played any part in the decision to award you a low bonus, or to sack you thereby depriving you of your bonus,  then you may have a claim under equal pay or discrimination legislation.  Unlike unfair dismissal claims, employees with less that two years’ service can bring a discrimination claim and damages are not capped.

Whistle-blowing – if you made some kind of complaint that your employer breached a legal obligation, and you think that you were awarded a low bonus or dismissed because of this, then you could have extra protection.  Your complaint might constitute a “protected disclosure” and you may be able to bring a claim ; like discrimination claims, you do not need two years’ service and damages are not capped.  

Conclusion

Bonus schemes can be complicated and if you have any doubts about where you stand, it is worth taking legal advice from an employment solicitor.  And remember, even if you think you cannot challenge non-payment of your bonus in law, it can still be worth bringing it up in negotiations.  If you have worked hard and performed well all year, then you may well feel that you have a moral claim to your bonus.   It is not unheard of for employers to have a conscience about these things; they may not offer to pay the bonus in full, but if other elements of a package are being negotiated then they may be more inclined to offer you a better deal overall to compensate you for the loss of your bonus.  

 


IMPORTANT: The contents of this page are general guidance only and should not therefore be regarded as constituting legal or other advice.

 

helping employees with settlement agreements since 2013