Scrapping bonuses
Operational efficiency
Pushed
for money
As economic and political uncertainty
continues to grip the nation, EDMUND TIRBUTT
hears the legal standpoint on making savings
by scrapping or withholding bonuses
Reducing, withholding or even
scrapping bonuses tends to become
a key consideration for HR when times
get tough.
Take today’s challenging retail
environment. The John Lewis
Partnership hit headlines in March when,
following a 45% slump in annual profits,
it announced that its bonuses were to be
slashed for the sixth consecutive year
leaving the employee bonus pot at its
lowest since 1954.
It’s an approach Guy Ellis, director of
HR consultancy Courageous Workplaces,
wonders if the UK will see more of
thanks to Brexit. “Brexit has created
enormous uncertainty in most industries
so bonuses will increasingly be in the
spotlight,” he says.
For Ellis cutting bonuses is a sensible
place for businesses to start when faced
with such instability.
“If a company isn’t sure what its
profitability or industry is going to be
like then I would support them looking
at reducing bonuses. It’s part of standard
business practice and is an awful lot
easier to do than reducing salaries,”
he says.
“The benefit of variable pay is that if
you have a bad year you don’t have to
give it but if you have a good year you
can afford to pay more, whereas you
can’t easily go back on salary increases.”
Bonuses can often be divided into two
areas: those linked to the company’s
financial performance and those linked
to the individual’s own performance.
While possible to reduce or cut both
types there are key factors HR must be
aware of before doing so.
The first – and crucial – step
is to look at the scheme rules
to establish whether the
bonuses concerned are
contractual or discretionary,
the latter meaning the company
reserves the right to make changes
without consultation.
Once this has been determined
there’s certain guidance HR should
follow if planning to scrap or reduce
employee bonuses.
Contractual bonuses
“A scheme could be contractual if it
was written into the contract of
employment or another document
without making it clear that it was not
intended to be contractual,” says Su
Apps, legal director in the employment
team at Ashfords Solicitors.
“If it is contractual it should only be
removed by consulting with employees
and obtaining their agreement.
Withholding a contractual bonus
without their agreement could lead to
expensive and time-consuming unpaid
wages or breach of contract claims.”
There is, however, an important
caveat. Even if scheme rules state that a
bonus is discretionary this is not
absolute. Legally the scheme can become
contractual if it becomes ‘part of custom
and practice’, for example if it is offered
as standard for a long time.
As Naeema Choudry, partner in the
HR practice group at law firm Eversheds
Sutherland, explains: “Anything offered
for 15 years or more may give rise to
problems in this respect. There are no
hard and fast rules as the court will look
at the circumstances of each case, but it’s
definitely a pitfall to watch out for.”
Discretionary bonuses
Even when scheme rules grant discretion
this must be used honestly and in good
faith, and must not be in breach of ‘duty
of trust and confidence’. If it is it could
still lead to contractual claims or
someone resigning and claiming
constructive dismissal.
“In some circumstances it could even
lead to a discrimination claim,” says
Choudry. “This happens most commonly
with maternity leave, so it’s important to
take advice as the area is case-specific.”
If a company is going to suspend or
remove a discretionary bonus it is
advisable to explain why. There may be
good reason for the organisation taking
this action, such as there being no money
to share or because changes are being
made to how bonus targets are set or
assessed. But this needs to be
communicated effectively to limit
discontent among the workforce.
“If there’s no money it makes sense to
explain to employees what needs to
happen for the firm to be able to give a
bonus in the future,” says Charles Cotton,
senior performance and reward adviser
at the CIPD.
“If you’re changing the rules you are
more likely to get employee buy-in if you
explain why changes are being made and
how it could affect them. If feasible it
would be worthwhile involving them in
the design and introduction of the
scheme, so they see the change as
something being done with them as
opposed to done to them.”
Another tip when removing
or reducing bonuses is to offer
replacements. Employees have built
up expectations of receiving a bonus
so it can be a good idea to offer
something else to soften the blow, such as
flexitime, longer sick pay terms,
increased holiday entitlement, or private
medical insurance.
“It’s about understanding what
motivates your employees. All of this
ultimately has a cost but it can be less
than the bonus cost,” says Rachel Reeves,
counsel of employment litigation at law
firm Allen & Overy.
“Switching from an individual bonus
to a team bonus is another step that can
be taken as it can motivate the workforce
to work harder as well as possibly save
money over the individual bonuses you
used to be paying.” HR
42 HR June 2019 hrmagazine.co.uk
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