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MASTERCLASS: Running the right bonus scheme

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A bonus scheme is a great way to incentivise your staff and keep sales and service standards high, but how can you ensure you’re running it in the right way? Katee Dias, senior associate in the employment team at Goodman Derrick explains the best solutions in offering employee performance-based benefits and common pitfalls to avoid.

Employee retention can be a tricky issue in the hospitality sector as many individuals see the type of work as a bit of a stop-gap, rather than an occupation for life. Bonuses are one method that employers might use to help incentivise employees to stay on and progress their career.

Types of scheme

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Bonus schemes come in all sorts of shapes and sizes. If a hotel owner is contemplating introducing such a scheme, there are a number of factors to think about, for example:

  • Will the bonus scheme be contractual or non-contractual? If contractual, the scheme is more difficult to change in the future.
  • Does the employer retain discretion over the terms and/or the amount to be paid? If so, is that absolute or just partial discretion?
  • Will the bonus be conditional, for example on individual and/or company performance?
  • What is the main purpose of the scheme? To reward past performance or provide a future incentive?
  • How much will the bonus be? Think about setting maximum/minimum limits or outlining a method of calculation.
  • Consider the practicalities. When will it be paid? Will it be pro-rated for those in their first year of employment?
  • Will there be a payment on termination? Sometimes a bonus is forfeited entirely and other times it might be pro-rated. Some employers even introduce good/bad leaver provisions so that it depends on the individual’s particular circumstances (for example, the employee still receives a bonus if they are made redundant but not if they are dismissed for gross misconduct).

Potential Traps

Running a bonus scheme can present some tricky issues and potential traps for employers, giving rise to disputes with employees and possibly even Employment Tribunal or Court claims being brought against them. Some areas to watch out for include:

Implied right to a bonus

If a bonus scheme is in place for some time and the employer habitually runs it in the same manner or the same amount is always paid out to the individual, that custom and practice can give rise to an implied right to the bonus (even if the scheme is described as being non-contractual). It can be helpful to employers if they add a provision making it clear that just because a bonus is awarded in one year, it should not give rise to any expectation of another bonus being awarded in future years.

Exercising discretion

Where a bonus scheme grants the employer discretion, it does not mean that the employer has free reign to do exactly as they wish. Discretion must be exercised rationally and in good faith. It should certainly not be used in a way which destroys the trust and confidence that exists between the employer and employee.

Subjectivity

Where a scheme is conditional on certain targets being met, try and adopt objective, measurable criteria as this is less likely to be open to challenge compared to subjective benchmarks. Therefore, instead of, say, assessing an individual’s work quality (which is difficult to measure and therefore likely to be a subjective assessment), consider whether you can focus on more objective measures such as their punctuality (assuming you have a reliable clocking in system) and positive and negative guest feedback received about them, perhaps even conducting a mystery diner assessment.

Discrimination

Care should be taken not to discriminate against individuals when operating a bonus scheme. For example, part-time and fixed-term employees should not be overlooked for bonuses. Using attendance records as a factor in bonus calculations could discriminate against someone with a disability or who has taken pregnancy-related sick leave. Further, it can be unlawful if an employee who is on maternity leave is not given a bonus.

Also, basing a bonus on the individual’s length of service potentially discriminates on the grounds of age against younger workers. That said, there is an exemption in the age discrimination legislation that allows employers to base rewards on 5 years’ service or less (for example, a bonus scheme whereby the employee gets specified amounts on each work anniversary up to and including their 5th anniversary).

If a bonus scheme incorporates a service-related element over 5 years’ service, in order to be lawful, the employer will need to show that the bonus scheme fulfils a business need. By way of example, an employer might say that such a scheme encourages loyalty. However, employers should be prepared to evidence this in case it is challenged. One way to obtain such evidence might be to undertake a staff survey to check that such a scheme really would encourage employees to stay.

Repayment

An employer may seek to make a bonus repayable if, for example, the employee leaves their employment before a specified date. However, employers must draft such clawback provisions very carefully as they could be challenged as a penalty or a restraint of trade (in other words, an unreasonable restriction on the employee from leaving their employment and moving on). If such a challenge was successful, the repayment provision might fail. It might be better, for example, to structure the bonus so an interim bonus is awarded or spread the payments out in instalments.

Bonus related claims

Failing to pay a bonus can give rise to breach of contract and/or unlawful deduction from wages claims. Also, unless handled with care, the manner in which the scheme operates may potentially lead to discrimination claims or allegations that there has been a breach of the implied duty of trust and confidence, therefore giving rise to a constructive dismissal claim. Litigation is a time-consuming and expensive process and, if the claim is successful, can lead to significant amounts of compensation being awarded to the employee.

An employer will therefore want to ensure that the rules of their bonus scheme are clearly drafted and fairly implemented to ensure that the scope for dispute is minimised. If done properly, a bonus scheme can be a great mechanism for improving employee retention and satisfaction.

About the author

Katee Dias is a senior associate in the employment team at Goodman Derrick, the London law firm.

Tags : advicebonusfinanceFINANCE & REVENUEmasterclass
Zoe Monk

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