COVID19 Employment Law Update #9


Bonus pay in a locked down economy

Is it the best of times or the worst of times?

On the one hand, many businesses have used this period to reassess and re-imagine how their work can be done: traders are now trading from home where before their managers had placed strict embargoes on such practices; museums are offering virtual tours and reaching customers that had hitherto been out of reach.

On the other hand, the reality of the global shutdown means that salaries are being cut, bonuses being slashed, and people are being laid off at record rates with no obvious end to the uncertainty in sight.

Coming as it has at the financial year end, the coronavirus and ensuing lockdown of the economy has put many companies in a deep quandary, raising many existential questions: how do we lock down without shutting down? How do we let people go when we can't do it face to face? What about bonuses that we can no longer afford to pay out?

Whilst there are no easy or universal answers to every scenario, there is a clear and honourable path that good employers can follow that will gain the respect of affected employees, even as it hurts deeply.

First, the questions.

Can we include bonus pay in the calculations we use to apply for funds on the government job retention (furlough) scheme?

The grants being awarded by the government for furloughed employees covers 80% of the regular pay that employees receive.

This means that any contractually guaranteed/compulsory commission or bonus payments can be included in the calculations, but discretionary (non-guaranteed) commission and discretionary bonuses cannot be.

Do we have to pay out bonuses that were earned but that we can no longer afford?

Short Answer: Yes, but...

Fuller version: If your employees have met the criteria to receive a bonus according to the terms that you (as employer) provided, then you are legally obliged to pay the bonus due. Any failure to do so will amount to a breach of contract, which could create legal liability.

The 'but' is because even if an employee has legally earned a bonus, it remains open to an employer to seek to reach agreement with its employees as to what should happen with a bonus that is no longer affordable.

If agreement can be reached with each employee for a reduction, temporary suspension, repayment, or worst case the total cancellation of earned bonuses, then this will operate as a variation of contract, allowing an employer to withhold bonuses according to the new agreement.

But there are many dangers to be alive to that should make this a very very very last resort:

  • there must be comprehensive consultation before any such variation is agreed. The numbers, the future plans, the alternatives to cutting bonuses - everything must be properly shared, discussed and properly considered, so that every employee can be considered to be giving his or her informed consent

  • anything other than absolute agreement should be treated as no agreement. If an employee accepts the deal, but under protest, he or she is effectively reserving the right to pursue the matter legally at a later stage

  • what is agreed should be recorded in writing and signed by both employer and employee so that there is no doubt or ambiguity about the terms

What if the bonus was described as 'discretionary'?

Short answer: Don't be fooled by the word 'discretionary'

Fuller version: Don't be lulled into a false sense of security by this. Typically, where a bonus scheme provides that it is entirely discretionary, this will mean that the employer has a discretion as to whether to operate a bonus scheme at any given time or not. It may also entitle the employer to decide which class of employees will benefit from the bonus and which wont.

However, once the employer has announced the bonus scheme, the basis on which it operates, who it applies to, and how it will be paid out, any employee who then carries out his or her duties on the basis of that bonus scheme, will be entitled to claim the resulting bonuses that are due to them for meeting the relevant criteria.

Surely, I won't still have to pay out the bonus even if the employee's employment is terminated?

Short answer: Actually, you may (and don't call me Shirley!).

Fuller version: It will depend on the terms of the bonus scheme.

Typically, the bonus scheme will provide that no bonus is payable to any employee not still in employment at the date that payment is made. If this is the case, then no bonus will be due.

However, if this is not expressly stated, it is entirely arguable that once the bonus has been earned because the employee performed the duties according to the bonus criteria, then it must be paid out even if the employee is no longer in employment when payment is due to be made - see the case of Brand v Compro argued by a certain young barrister you may know).

I'd recommend checking the terms of the bonus scheme carefully.

How should we approach this whole discussion with our employees?

The simple guiding principle that governs pretty much all employment law is: Be Fair!

As trite as that may sound, the vast majority of cases that succeed in the Employment Tribunal do so by highlighting a fundamental failing of fairness at some point in the employer/employee relationship.

On the other hand, employers that put 'fairness' front and center in the way they manage their people and processes, are sued less often and achieve better outcomes if they do end up in Tribunal, even when they have made honest mistakes.

When considering what is fair in the discussion with employees about bonuses, an employer should remember that:

  • the employer/employee relationship is fundamentally imbalanced with power largely residing with the employer. This makes employees uniquely vulnerable

  • no employee wants less money. Even if they agree that this is necessary, there will likely resent it. Accept that this is an inevitable and very human reaction. #

  • clarity and compassion matter - read the message to employees recently sent by Brian Chesky, founder of AirBnB, in the wake of a brutal 25% culling of employees

  • employees need and deserve as much access and information about the company finances as possible so that they can see the justification for the decisions, and put forward possible alternative options

  • any contractual changes cannot be imposed, but must be agreed

  • any agreed changes should be recorded in writing and shared with the employees

  • bonus reductions/cancellations should be as limited as possible in amount and duration. Anything longer or greater than actually needed could lead to a legitimate claim or even unfair constructive dismissal.

For more specific advice on employment law and the coronavirus pandemic, feel free to reach out to our clerks in chambers on 0207 936 3030 or clerks@1ec.co.uk

Kolarele Sonaike

1 Essex Court

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