Member Article

On the fifth day of Christmas, HR announced with fear...

We’re stopping the Christmas bonus for everyone this year!

Employers and individuals alike are feeling the impact of increased costs this winter, and it may well be that some employers will seek to save costs by not paying a bonus to employees this Christmas. But is it lawful to simply decide not to pay a Christmas bonus one year? The answer lies in the employment contract.

An employee is only entitled to a Christmas bonus if it is a contractual right. Where an employee’s contract sets out an entitlement to a Christmas bonus, and any criteria for payment of that bonus has been met, then a decision by the employer not to pay that bonus will be unlawful and will give employees a potential claim for unlawful deductions from wages or breach of contract.

It is important to remember that a Christmas bonus may also become a contractual right as a result of custom and practice. This means that if employees have regularly received a Christmas bonus in previous years, such that there is a clear expectation the same amount will always be paid, the right to the bonus will form part of their contract and again, any attempt by the employer to withhold that bonus would be unlawful and could result in claims for unlawful deductions from wages or breach of contract.

By contrast, provided that the terms of the bonus scheme are clearly discretionary, an employer will be entitled to exercise its discretion not to pay a Christmas bonus so long as it is not acting irrationally or perversely in doing so. If the bonus has not been paid every year, and the amount of bonus varies year on year, it will be easier for the employer to show that the scheme is discretionary and, importantly, that it is not sufficiently certain to have been incorporated into the contracts through custom and practice.

If a decision is taken to withhold the bonus, an employer should also take care that the decision is not potentially discriminatory and that all employees are treated consistently. For example, if some employees receive a bonus while others do not, this exposes the employer to the risk of claims of less favourable treatment if, for example, bonus is awarded based on attendance without any carve out for disability or family leave related absence.

 

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