Bonus disputes – tips for employers

  • Posted

We help employers put in place bonus plans that will help motivate employees and directors to deliver. Experience in dealing with employees helps us understand where the employer could be vulnerable when faced with bonus disputes.

Based on questions we are most frequently asked by employers we have explained:

Cash bonuses

A bonus can be contractual or discretionary or a combination of both.  Discretion provides an employer with more latitude.

Fair calculation of the bonus targets

Many bonuses are based on hitting targets measured against the accounts.  The question arises, how are the revenues and targets to be actually measured?  In a dispute situation the employee could get discovery from the Employment Tribunal to look behind the paperwork to interrogate the actual method used for calculating the bonus.

Bonus payments can be measured against the performance of shares and a range of valuation methods can be deployed.  This type of bonus is often called a phantom option but as real shares are not used it is not actually an option over shares.

Common problem area for employers with bonus targets

Many challenges succeed when the financials are picked over.  Therefore the employer needs to think through the structure of the bonus before it is presented.  Attempts to over complicate can in our experience back fire.  And, if an employer tries to change the bonus the employer could find it has repudiated the employment contract with the result that the restrictive covenants are unenforceable.  Further details on claims employees can make are explained below.

Fair exercise of discretion

An employer’s discretion must be fairly exercised.  What is fair is open to interpretation based on the facts.

Fairness depends upon not only the rules of the bonus plan. Consideration is required as to how the discretion has been applied for any particular employee.  The courts will take into account how others were treated.  Employers must keep detailed minutes justifying decisions as these can be the vital evidence needed in dealing with a bonus complaint.

  • The terms “absolute”, “sole”, and “reasonable” use of discretion are subtly different and yield different interpretations in practice.

Share based bonuses

Bonuses can come in the form of shares for employees.  There is plenty of flexibility especially in private companies.

  • Shares provided to employees or directors can increase in value if the bonus targets are met or taken away if the bonus targets are not met – the usual route is to consider growth shares.
  • EMI, unapproved or HMRC approved options can be awarded designed to become exercisable if the bonus targets are met.

Shareholder approval

The employer may need shareholder approval to issue the shares.  A review of the articles and shareholders agreement is also recommended.

Compulsory transfers

In many private companies it is the intention that the employee is required to transfer shares on cessation of employment for any reason. There are protections which can be put in place.  Protections are not automatic and do require negotiation.

Options

Most employee options will lapse on cessation of employment for any reason. But the employer does need to draft such requirements and include appropriately worded waiver of liability clauses.

Tax

The provision of shares to employees is taxable.  Working out the value of shares or the tax liability for private companies is not straight forward. If the shares subsequently decrease in value, HMRC does not refund due the tax you paid on receipt of the shares. The employer will need an indemnity from the employee to cover off the risk of unexpected PAYE tax charges arising.

Claims employers want to avoid

Employees have the following heads of claim to consider as a way to being paid what they think is a fair bonus.

Providing information about the bonus to the employee

Extracting information from an employer concerning their decisions on bonus payments is often the stumbling block for employees. Employers naturally want to make it hard for employees and there are ways this can be achieved.  But, a court or the Employment Tribunal can order disclosure. Or the employee can make a request for information under the Data Protection Act.

If the employee believes discrimination is in play can serve a questionnaire on the employer.  Discrimination questionnaires will often  can be served by employees alongside a grievance.

Refusal to co-operate

Employers can be penalised for not co-operating and or being unreasonable.  The way employers can be penalised differs depending upon which court hears the case.

  • In the Employment Tribunal the risk is the compensation awarded is uplifted by up to 25%.
  • If the case is brought in the High Court the employer runs the risk of a costs award if it caused costs to be incurred unnecessarily.

We do see cases settle shortly before the deadline for any order for disclosure made by the court.