Top 5 Mistakes Managers Make… In Bonus Season

With bonus season upon us, many managers will be in the process of deciding who gets a bonus and how much they should be awarded. 

Unfortunately, this process can give rise to a number of employment issues - here are a few pitfalls to watch out for:

1. Dismissing employees around bonus time

Whilst you may be tempted to time a dismissal to avoid paying an employee their bonus, this is a risky strategy. Doing so could give rise to a claim of unfair dismissal, particularly if your dismissal process is accelerated to ensure the employee is no longer employed on the date the bonus becomes payable.

If you are considering dismissing an employee around bonus time you should take care to explain to the employee why you have a fair reason to dismiss them to limit the risk of any claim.

2. Dealing with periods of leave

If you have staff who have had a period of leave during the bonus year, you might want this to be reflected in their bonus award, either by pro rating the payment or awarding no bonus at all.

Whilst this can be done lawfully, you should take care when dealing with employees who have been on maternity leave or absent from work due to ill health. Any changes to their bonus could amount to less favourable treatment and give rise to claims for discrimination.

In most cases,it is advisable to pay a pro rated bonus for the period in which the staff member was in work rather than no bonus at all. For employees on maternity leave, this pro rated period must include the first two weeks after child birth.

3. Paying less than you’d promised to

If you have said something (even verbally) to an employee to indicate the level of bonus they can expect, you may be bound by it. Whilst it does depend on the terms of the employee’s written contract, some assurances could give the employee the legitimate expectation that they will receive a certain amount. In those circumstances, you may be in breach of contract if you pay them less than you promised to.

4. Thinking that the bonus is entirely discretionary

Whilst you do have discretion as to how much you award employees, there are limits on how you exercise that discretion. Staff are entitled to expect that management will use their discretion rationally and could claim for breach of contract if they do not.

To avoid such claims,you should keep a record of your reasoning for awarding each bonus amount, particularly where you decide to give significantly disparate bonuses to staff in similar roles or positions.This will help to stave off the suggestion that any unlawful considerations (such as discrimination or personal grudges) were taken into account.

5. Not abiding by the rules

If you work in financial services, you should not forget any relevant regulatory rules when deciding on a bonus award. There are a number of remuneration codes which may apply depending on the nature of your business. The European CRD IV reforms also affect bonus payments.

Amongst other things, the codes contain rules on deferral, requirements for non-cash elements and a cap limiting bonuses to 100% of basic pay (or 200% with shareholder approval).Failure to abide by these rules could lead to intervention by the Financial Conduct Authority.

Sarah Owbridge is a paralegal at leading senior executive employment law firm BDBF.