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As an employer, you may be looking for ways to improve employee retention. One way to ensure your staff remain with your business in the long-term is by incentivising them with bonuses. However, while you may want to pay your employees a bonus, different rules apply to different types of bonuses. Above all, you must ensure that you pay bonuses fairly or else you could face a claim for unlawful deduction of wages. This article will explain what you need to know about bonuses in England.
What Are Bonuses?
A bonus is typically a form of monetary compensation that you pay your employees in addition to their regular wage or salary. However, bonuses can be in the form of a reward other than a cash payment. In saying that, the two main types are:
- contractual; and
- discretionary.
Contractual Bonus
A contractual bonus is also known as a non-discretionary bonus. It is an amount that you and your employee agree to in their employment contract. That is to say, you guarantee your employees that you will pay them a bonus.
You may decide, for example, to pay your employee an agreed amount each time they make a sale over their monthly target. However, while the bonus is guaranteed, providing your employee meets the criteria, you do not have to guarantee the reward amount.
Discretionary Bonus
A discretionary bonus is a bonus that your employee will not automatically expect and will have no idea what the amount may be if they receive it. For example, discretionary bonuses usually concern performance over a year.
You might set criteria for paying a discretionary bonus if your employees meet business targets. However, if you regularly pay discretionary bonuses, the bonus may become an implied term in your employees’ employment contracts. This is because your payment of discretionary bonuses has become the custom and practice’ of your business.
Why Pay Bonuses?
As an employer, you may pay your employees a bonus on top of their regular pay or commission as part of their pay structure. A bonus might be something you or your employee negotiate as part of the recruitment process.
As a bonus concerns the performance of either your employee or your business, you may decide to pay these to encourage your staff to work well to achieve specific targets within your company. A bonus can, therefore:
- improve productivity;
- help retain employees;
- make your employees feel valued in your business;
- achieve a positive working relationship and environment; and
- act as a ‘thank you’ to your staff.
You may also choose to pay your employees a bonus rather than committing to a salary raise.
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Paying Bonuses
When you pay bonuses, you must take a fair approach. Therefore, you cannot decide to reward your discretionary bonuses only to those you like. Instead, when determining who should receive a bonus, you must exercise good faith and make payments on reasonable grounds.
If your employee feels that you have not done so, they could claim an unlawful deduction of wages. As an employer, you should also be careful about how you reward bonuses, for example, in terms of:
- where an employee has been on maternity leave for part of the year;
- how bonuses may indirectly affect employees with protected characteristics, such as their race or religion; and
- how they affect the overall pay rates between men and women in your business.
A bonus will typically apply where your employee:
- is not working on notice;
- has been working for the whole year the bonus refers to; and
- continues to work for you once it is due.
When paying your employees bonuses, you must inform HMRC of this. However, it is possible to issue tax-free bonuses, such as:
- medical incentives;
- retirement contributions;
- health saving account; or
- donations to your employee’s chosen charity.
Key Takeaways
As an employer, you may decide to give your employees a bonus. However, you must ensure that you reward bonuses fairly and reasonably. Where you guarantee your employees a bonus, you should set this out in their employment contract. On the other hand, discretionary bonuses are not guaranteed but can be implied in an employee’s employment contract because you have a history of paying them. Furthermore, while a bonus can be non-cash payments, they may not be tax-free. Hence, you must ensure that HMRC knows you have paid relevant bonuses.
If you need help understanding bonuses in England and Wales, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A bonus is an additional compensation you may pay your employees above their regular salary.
There are two main types of bonuses are contractual and discretionary. A contractual bonus are where you guarantee payment of a bonus to your employee in their employment contract. On the other hand, a discretionary bonus is a payment you decide to make based on fair and reasonable factors.
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