Can We Scrap Our Employee Bonus Scheme?

As the high-street and local stores come under threat from closures due to our changing shopping habits, businesses are looking for ways to reduce their spending, and employee bonuses are the main focus.

A number of UK-based companies have warned that their annual staff bonus scheme is under threat due to their profits being “substantially lower” than previous years.

So what happens if your business hits hard times and is no longer able to offer an employee bonus scheme?

Discretionary vs contractual benefits

Deciding whether to get rid of your employee bonus scheme

Before a decision is made to stop providing bonuses to employees it should first be established if the bonus is contractual or discretionary.

Discretionary benefits, which are monetary awards that are provided to the employee purely at the employer’s discretion and have no set qualifying criteria, can be removed or amended as and when the employer wants. In contrast, contractual benefits are paid in accordance with the terms of an employment contract and therefore cannot be changed or removed without agreement from the employee.

Can employers scrap their employee bonus scheme?

If a bonus is a contractual entitlement, employers will need to get employees’ agreement before it can be amended or withdrawn; this is the case with any contractual entitlement. Obtaining agreement is likely to involve a period of consultation with the employee in order to discuss why the company can no longer continue to provide it. Because of the obvious detrimental impact on employees, it can be difficult to get them to agree and an employer may consider enforcing the change by dismissing employees on their current terms and re-engaging them with the change enacted. However, as this would involve a dismissal, the employer must be able to demonstrate that they have a good business reason for removing the bonus to avoid an unfair dismissal claim.

The situation is less complicated for new employees, who can simply be provided with a set of terms and conditions which do not include a bonus entitlement.

When you might encounter problems

The problem between discretionary and contractual bonus schemes is that a scheme may be labelled discretionary but, because of the way it has been operated, is not. For example, a bonus may start off discretionary but may become an implied term in a contract of employment if the employee can demonstrate that payments have been made regularly over a number of years and have come to be expected, though this will depend upon the specific facts of the case. Employers should review the scheme to see how regular the bonus has been distributed and if there have been any occasions over previous years where it has not been.

Going forward, they can also attempt to avoid this by clearly stating in the contract that benefits form part of a discretionary bonus scheme, outlining that the employer reserves the right not to award it and that it can be withdrawn at any time.