Can we scrap our employee bonus scheme?

If an employer wishes to remove an existing scheme, they should proceed with caution.

Employers can and do reserve the right to stop or remove a bonus scheme if they do not believe they can meet the cost, or feel that it is having a detrimental effect on the company.

For example, this extra incentive may be encouraging poor employee behaviour in order to meet the key targets required to be awarded the bonus. However, before a decision is made it should first be established if the bonus in question is contractual or discretionary.

More on pay and reward:

Back to basics... Awarding bonuses

Publishing salaries openly reduces gender pay gap

Jealousy over new starters' bumper pay leads to resignations

Discretionary benefits can be removed or amended as and when the employer wants. For example, a discretionary bonus could be a reward for an exceptional performance, contribution or accomplishment that goes above and beyond the employee’s usual realm of job duties.

Bringing a discretionary bonus to an end would not create a problem for an employer because, by its very nature, no expectation has been created among employees that they will receive it and it is not viewed as an entitlement.

In contrast, contractual benefits are paid in accordance with the terms of an employment contract and therefore cannot be changed or removed without agreement from the employee.

These types of incentives are typically set out within the contract and usually include 13th month payments (which provides one-twelfth of the basic salary of an employee and is mostly paid at Christmas) and retention bonuses.

If a bonus is a contractual entitlement employers will need to get employees’ agreement before it can be amended or withdrawn. Obtaining agreement is likely to involve a period of consultation with employees to discuss why the company can no longer provide it.

It can be difficult to get employees to agree and an employer may consider enforcing the change by dismissing employees on their current terms and re-engaging them with the change enacted. However, as this would involve a dismissal the employer must be able to demonstrate that it has a good business reason for removing the bonus to avoid an unfair dismissal claim.

The situation is less complicated for new employees, who can simply be given a new set of terms and conditions that do not include a bonus entitlement.

The problem between discretionary and contractual bonus schemes is that a scheme may be labelled discretionary but, because of the way it has been operated, is not. For example, a bonus may start off as discretionary but may become an implied term in a contract if an employee can demonstrate that payments have been made regularly over a number of years and have come to be expected.

In these situations an employment tribunal will consider all relevant circumstances and may decide that the employer’s discretion to provide the bonus could be construed as having a contractual intent.

When deciding whether a bonus is still discretionary, employers should first hold a review to see how regularly it has been awarded and if there have been any occasions where it has not. It should also be considered if they have the discretion as to whether to make the payment at all or if this discretion relates only to the performance threshold or percentage of salary that will be paid.

Going forward they can also attempt to avoid this by clearly stating in the contract that the benefit forms part of a discretionary bonus scheme; outlining that the employer reserves the right not to award it and that it can be withdrawn at any time.

Clare Parkinson is pay and reward manager at Croner