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Bonus season: how to minimise disputes

As bonus season rapidly approaches many employees will be expecting a significant award

With the recovery strengthening and trading conditions improving for many businesses, expectations may be higher than in previous years. The mismatch between employees’ expectations and the reality of bonuses is often the trigger for disputes.

Even if disputes do not escalate to legal action it can be very difficult to motivate staff once a relationship has been damaged by the disappointment of a low or non-existent bonus. Recent case law has made deciding and awarding bonuses more complex, and in many cases contracts and processes will need to be updated to reflect these court judgments.

Employers like to have flexibility over how they reward staff, but not all changes to bonuses will be legally watertight. Businesses that decide not to pay bonuses or reduce the size of the pot may find those changes subject to challenge. One of the most common mistakes is for employers to act as if bonuses are entirely discretionary, but employees – and indeed the courts – often take a different view. Recent cases have established that the employer does not have unfettered discretion, but must exercise discretion in good faith and on reasonable grounds.

To further complicate matters, employers may find it difficult to justify not paying certain bonuses if they had by custom or practice paid similar bonuses in previous years. With volumes of work having rebounded in many industries employees may feel that they deserve bonuses to match, and so may benchmark any awards against what they were paid in pre-crisis years.

Whenever a dispute over a bonus or commission payment arises, the first point of reference is the employee’s contract of employment. Typically the contract will state that the payment of a bonus is entirely at the employer’s discretion, but even if that is the case an oral agreement made elsewhere might take precedence. Recent case law has made it clear that even verbal promises can be legally binding and give disgruntled staff grounds to bring claims. Employers have to be very careful about what they say, particularly in informal settings.

Even if an employer acts in good faith, it might be difficult to defend a decision if the reasons for a low or non-existent bonus have not been set out in the bonus documentation beforehand. It is therefore important that contracts are drafted carefully and clearly set out how bonuses are awarded. All too often contractual terms are vague and subject to differing interpretations, which can lead to disputes.

Other than contract clarity, it is good practice for employers to engage with employees on the issue of bonuses throughout the year, keeping them abreast of performance-related issues so that expectations are properly managed. Regular informal appraisals are a vital management tool, helping to ensure that expectations are aligned and lessen the chance of disputes.

Employers should be judicious in how they exercise their discretion and communicate clearly how a decision has been arrived at. For example, failing to give reasons for an individual’s bonus could amount to a breach of the implied term of mutual trust and confidence. By ensuring contracts are drafted appropriately and that bonuses are decided in a clear, non-discriminatory and objective manner, not only can claims be avoided but staff motivated to perform better.

Darren Hayward is a partner at law firm Nockolds