Bonuses for absent employees: To pay or not to pay? 

May, 2022 - Shoosmiths LLP

As organisations start to rebuild post pandemic, many will be considering the introduction or reintroduction of bonuses to their employees. However, when it comes to payment of bonus to those who have had time away from work, employers need to take care.


Bonuses can either be contractual, where the employer is obliged to pay the bonus if the relevant conditions are met, or discretionary, where the employer can decide whether to pay the bonus, as long as that decision is made in good faith. Whichever type of bonus arrangement is in place, a challenge that often arises is the extent to which payments can be reduced to take account of time that an employee spends away from the business, whether that is because of maternity, other family-related leave or sickness absence. Mis-handling the payment of bonus to such individuals has the potential to give rise to claims of discrimination. The best approach depends in many respects on whether the bonus is intended to be a reward for the individual’s performance - whether in the past or as an incentive for future performance - or is simply awarded for company performance reasons. Businesses can often operate a combination of both or either of the two.


Bonuses for company performance

If a bonus is awarded simply as a consequence of company performance and the only criterion is that the employee is employed at the time of payment, non-payment or pro-rating payment to those on family leave or long-term absence could throw up some challenges.


An example of this would be a one-off Christmas bonus that is paid to all employees regardless of their individual performance but simply because they are current employees. We consider that such payments would not come within the definition of remuneration and therefore withholding or reducing those sorts of bonuses from individuals who are away from the business on any kind of leave could give rise to a claim of discrimination due to maternity leave or disability discrimination if the employee’s health condition constituted a disability in terms of the Equality Act 2010. In addition, where the bonus is contractual, there would also be the risk of a breach of contract claim.


Bonuses for individual performance

Turning to bonuses paid in relation to individual performance, which are significantly more common, there has been case law to confirm that the pro-rating of such bonuses is lawful.


In the case of an employee absent on maternity leave, a failure to pay full salary or bonus because she is on maternity leave will not generally be unlawful because there are special provisions in the Equality Act 2010 which allow employers to apply a pro-rata reduction to reflect time spent on non-compulsory maternity leave. This is the case whether the bonus is contractual or discretionary.


However, it is important to ensure that the reduction in bonus is no greater than this, otherwise it would be unlawful. For this reason, any bonus should be based on the time the employee has spent at work before maternity leave, during their two (or four) weeks of compulsory leave and after their return. This was confirmed in the case of Lewen v Denda [2000].


If a bonus payment is intended as an incentive for future performance, it will be necessary to establish over what reference period the employees in question were intended to be incentivised and again to pro-rate this for an employee who is on maternity leave for part of that reference period. The longer the period, the smaller the pro-rata reduction that would be appropriate for an employee on maternity leave.


This approach will apply to performance-related bonuses, whether based on individual, team or company targets that the individual contributes towards. It will also apply equally to those on adoption leave or shared parental leave. Employers should ensure that they include provision for this in the written terms of any such bonus scheme, so that employees understand the approach that will be taken.


The other aspect of bonus plans of which companies should be mindful in relation to employees on family leave are the criteria for bonus payment. It would be beneficial to ensure that the criteria applied do not render it impossible for those on leave to potentially achieve bonus for the portion of the bonus calculation period that they have been at work. It would also be beneficial to avoid any bonus criteria which are overly subjective to limit the likelihood of the employee arguing that the decision maker has reached their decision unfairly by considering the time the individual has spent away from the business.


Bonus and sickness absence

So what about those employees on long-term absence, should the approach be the same for them?


The risk is that taking an approach which could be perceived as detrimental could amount to disability discrimination if the employee’s health condition constitutes a disability under the Equality Act 2010. If the employee is treated unfavourably because of their absence as a result of their disability, this could give rise to a claim for discrimination arising from disability under section 15 Equality Act 2010.


Although such unfavourable treatment can in some circumstances be objectively justified, this will require the employer to identify a legitimate aim and apply that aim proportionately. A recommendation would be that employers give some thought to the aim of their bonus policy and particularly the element attributable to personal performance. In a case involving the Land Registry the legitimate aim for restricting the bonus policy to those at work was that it was in place to acknowledge employee contributions and specifically encourage and reward good performance and attendance. That aim was found to be legitimate. A proportionate application of that legitimate aim would arguably be to pro-rate the calculation of the bonus to time spent at work so that someone off on long term sick leave isn’t unduly prejudiced and to allow for an element of discretion in the policy to make payment to those on long term absence with a disability in circumstances where it is considered appropriate to do so. We would recommend that in such cases employers clearly stipulate the legitimate aim and approach to be taken in their policy.


Conclusion

What is clear is that this is a complex area and organisations are well advised to take specific advice on the arrangements they have in place if they are seeking to withhold or reduce any bonus payment from employees who have been absent from the business.


 



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