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Bonuses: the credit crunch casualties

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As a result of the current down turn, the financial services sector has been under intense media scrutiny over the manner in which its workers are remunerated.  The Government is asking the banks to look very carefully at the bonuses which are paid to their staff and for those institutions which have received state aid, a blanket ban on bonuses has been suggested. With rising unemployment and many families struggling to make ends meet, it is perhaps no surprise that public sympathy for City bankers, told they may not receive their million pound bonuses this year, is somewhat scarce. While the fate of these institutions may be led by Government pressure, employers all over the country are faced with the same problem, should bonus payments be made and what are the legal implications of not doing so?

For employers, the first step is to consider the language of the bonus scheme (to the extent that it is committed to writing). Whether the employer can make changes to the bonus arrangement without employee consent will depend on the type of plan in place. A well drafted bonus scheme will usually make it clear whether the scheme is:

- Non-contractual and totally discretionary (for example, the employer has complete discretion as to when to pay and how much, if at all); or

- Non-contractual and partially discretionary (for example, the plan provides for maximum annual payments and sets out the performance measures and payment provisions); or

- Contractual, with discretionary terms (for example, the plan contains subjectively measured performance targets); or

- Contractual, with contractual terms (for example, the plan contains the performance target and payment terms, and these are objectively justified).

The general principle is that employers can only make changes to a bonus scheme without an employee's consent if the bonuses are payable under arrangements which have a discretionary element and the proposed change falls within the scope of the employer's discretion. However, in some cases the exact nature of a particular scheme may be more debatable, leading to the potential for dispute as a result. An employer should consider all the terms of the scheme, all employee communications about the plan and the history of bonus payments under the plan, before concluding that any element is discretionary. For bonus schemes which are not clearly defined, the repeated payment of bonuses over time may mean that payment of a bonus has become an implied contractual term through custom and practice. In any event, even if employee consent is not strictly required, consulting or at least informing affected staff about the changes is recommended.

An employer may also be able to make changes to strictly contractual bonuses, but will need employee consent to be able to do this. If an employer seeks employee consent, it should do so in writing and in plenty of time for the change to take effect before participants become entitled to receive the bonus payment. Like the banks, employers will be counting on a degree of support from employees who appreciate the difficult external environment and accept this measure as an alternative to redundancy. However, the likelihood is that once redundancies are announced, the picture will change, as ex-employees are more likely to dispute amendments to their bonus entitlements or a failure to pay a bonus for their final period of employment.

If you would like advice about the payment of bonuses or changing terms and conditions of employment, please contact a member of the Clarion employment team.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.