Employment law & the festive season
The festive season is approaching and, as a change from providing guidance on office parties, we focus on another seasonal topic instead – which is that of Christmas bonuses.
Christmas bonuses are a great way of rewarding staff and what better way to add to the festive cheer and goodwill than by giving your staff a bit extra at the end of what – for many – can be a very expensive time of year. However, it is an area that can give rise to problems, particularly when an employer decides that the business cannot afford to pay a staff Christmas bonus this year.
Here we answer some of the common questions that arise in this area.
Are we obliged to pay a Christmas bonus?
No one wants to be a Grinch at Christmas but sometimes cost saving measures have to be made by businesses and unfortunately this can mean cutting back on paying Christmas bonuses. However, deciding not to pay a Christmas bonus can potentially create problems, especially where it has become a regular practice and employers feel obligated to make such payments.
The answer as to whether an employer is required to pay a Christmas bonus is, as you may expect, far from straightforward. The starting point however is to look at whether the employee has a contractual right to the bonus or if the bonus is discretionary.
Contractual vs discretionary bonuses
The right to be paid a bonus can be contained in the employee’s contract of employment or in a bonus scheme that is expressed to be contractual or the right can be one that has developed over time, through custom and practice.
If the employee’s contract contains a clause that entitles the employee to a Christmas bonus of a certain level (a guaranteed bonus), then you are bound to pay that amount and will be in breach of contract if you do not do so. This kind of arrangement leaves very little, if no, wriggle room for the employer.
So, what, if anything, can you do if you find yourself in this situation?
First, you could try and seek the employee’s consent to waive their entitlement to receive a bonus. If that consent is not forthcoming, then you may decide to pay out the bonus on this occasion and then look to amend the employee’s contract at a later stage – perhaps at salary review time. These are the least contentious routes you can go down – there are other paths that you can take when you need to make a change to an employee’s terms and conditions but it is best to seek legal advice before taking any further action.
However, situations in which an employee has a right to a defined Christmas bonus in their contract are thankfully rare (although it is not unusual for key individuals to be promised a guaranteed bonus, particularly in the first year of employment). It is more common for a contract to say that a Christmas bonus is payable at the employer’s discretion. This allows you a greater measure of flexibility and you can potentially exercise a discretion not to pay a Christmas bonus or a lower bonus than previously. However, you must be careful how you exercise such a discretion because there is an implied contractual duty on employers not to exercise a discretion in bad faith or in a capricious way. You also need to be mindful of avoiding exercising your discretion in any way that could be seen as discriminatory. It is therefore important, if you decide not to pay a Christmas bonus to you staff, that you justify your reasons in full and explain to those staff affected why bonuses are not being paid this year or why the level of bonus is low, to avoid any allegations that you are in breach of contract or that you have acted in a discriminatory way.
Custom and practice
A more common situation still is where the contract is silent about Christmas bonuses but where the business has paid out a staff Christmas bonus every year without exception. In this scenario, it is possible that an employee may argue they have an implied contractual right to a Christmas bonus. This will usually be based on an argument that there is an established custom and practice of receiving an annual bonus at Christmas, which has given the employee a reasonable expectation that they will receive one every year. The threshold however of when a practice becomes an implied contractual right is quite high and it will depend on the regularity of the payments, the degree to which the amounts vary from year to year and how long they have been paid. For example, an employer that has paid a Christmas bonus every year for the last 30 years is going to struggle to argue it has not become a contractual entitlement, whereas an employer who pays a bonus on a more ad hoc basis is unlikely to be contractually bound to pay such a bonus.
Where custom and practice has potentially given rise to a contractual obligation, this can create quite a tricky situation. On the one hand, you will probably not want to agree that you have a contractual obligation to pay a Christmas bonus to your staff because of the implications this will have as already mentioned. On the other hand, you risk claims of breach of contract or unlawful deduction of wages if you do not address the issue and simply decide not to pay bonuses.
To avoid this rut, we recommend that you are open and upfront with your staff and that you fully communicate to them the reasons why the business is unable to pay a bonus this year, or why you are only paying a bonus to some employees or not others. By doing so, you are less likely to receive complaints from surprised and disappointed employees and by explaining your reasons, you are more likely to engender understanding and acceptance of your decision.
Do we have to pay a Christmas bonus to all staff?
This question assumes a situation where an employer decides only to pay bonuses to well performing employees.
If the payment of a Christmas bonus is discretionary (bearing in mind the points already made about guaranteed bonuses and custom and practice) you can potentially pay Christmas bonuses to some staff and not to others, providing that you judge each employee fairly and use objective and non-discriminatory criteria when deciding who you are going to award such bonuses to and how much. In particular, this means avoiding criteria such as length of service (potentially indirectly discriminatory on ground of age) and absence records (can indirectly discriminate on grounds of disability, pregnancy or maternity).
It has to be said, however, that this selective approach is not going to be the best morale booster for those staff who don’t get a bonus. This is why a more common approach is to pay all staff a Christmas bonus, but of varying amounts depending on objective criteria such as their performance.
Is an employee on maternity leave entitled to a Christmas bonus?
The legal issues relating to bonuses for women on maternity leave are very complex because of the different types of bonuses you can have (contractual, discretionary etc) and the different reasons for which bonuses can be paid (rewarding company or personal performance or encouraging loyalty and staff retention). Advice should always be taken in this situation because, as you will no doubt be aware, there are special protections afforded to women who are pregnant or who are on maternity leave and an employer could be at risk of a claim of detrimental treatment and/or discrimination if they do not get it right.
What is clear is that discretionary “one off” payments like Christmas bonuses must be paid to women on maternity leave in full. Therefore, if you pay a Christmas bonus of a fixed amount to all your staff and this payment is genuinely discretionary (i.e. it is in the nature of a “gift”) then you must pay the same amount of bonus to any employees on maternity leave. Given that a lot of Christmas bonuses are just that – “gifts” or goodwill gestures – the situation will be straightforward for most employers.
Where it gets more complicated is when the decision whether or not to award a Christmas bonus, or the decision as to how much of a bonus is paid, is based on an employee’s performance. This is because the employee on maternity leave may well have been away from work for some of the period during which performance would ordinarily have been assessed. In this situation, you are best to seek advice to make sure you exercise such discretion appropriately and calculate the employee’s bonus correctly.
Do we have to pay a Christmas bonus to employees on other kinds of parental leave?
Again, if the nature of a staff Christmas bonus is that of a gift or goodwill gesture, then it should be paid to any employees who are on family leave – whether it be adoption leave, shared parental leave, paternity leave or parental leave. Employees who take family leave are entitled to protection from being subject to a detriment because they are on such leave – failure to pay a Christmas bonus therefore to such employees would carry the risk of this kind of claim.
How do we ensure we are not bound to pay a Christmas bonus?
The most effective way of achieving this is by having a policy in place which makes it clear that Christmas bonuses are entirely at the discretion of the business and are not contractual. Before putting such a policy in place, however, you should carry out a thorough review of your contracts, policies and other documentation to check whether they deal with the question of giving a Christmas bonus. If in doubt about how to implement such a policy, seek advice.
What else could we do to reward employees at Christmas?
There are other ways in which you can show your appreciation to your staff that do not cost a fortune – for example, a small gift accompanied by a handwritten note, giving staff extra time off or implementing flexible hours or working arrangements over the holiday period. All of these ideas (and these are just a few) can help your staff feel valued, appreciated and invested in your business.
As always, if you have any queries about any of the legal issues raised here, please do not hesitate to contact the team at Real Employment Law Advice.