Are employers obliged to award a Christmas bonus to their employees?
Christmas is a time of year where employers thank their employees for their commitment throughout the year. This is commonly expressed through a Christmas party and may also be shown through the award of a Christmas bonus. However, the decision on whether to award a Christmas bonus is often a complicated exercise, including a consideration of many different factors. This can often lead to an employer asking, am I obliged to award a Christmas bonus to my employees?
There is no statutory entitlement to a Christmas bonus and so the answer will depend on whether there is any contractual entitlement.
Employers should first check any written employment contracts and policies to see if these contain anything about Christmas bonuses.
When considering any entitlement to bonuses, it is important to distinguish between contractual and non-contractual bonuses.
A bonus which is contractual will often be expressed as either an entitlement:
- to participate in a bonus scheme; or
- to a certain level of bonus, should specified targets be hit.
If an employee has a contractual bonus and meets the required criteria, a bonus must normally be paid. Failure to do so could lead to a claim for unlawful deductions from wages or breach of contract.
An employer could also face a claim of unfair dismissal if it chooses to dismiss an employee because they asserted that a contractual bonus had not been paid. This type of unfair dismissal claim would fall within the “assertion of a statutory right” regime set out in section 104 Employment Rights Act 1996 – the statutory right being not to suffer unlawful deductions of wages. Importantly, a dismissal falling within section 104 would be automatically unfair, the employee would therefore not require two years’ continuous service to bring the claim.
Alternatively, a bonus which is non-contractual will typically set out that an employer maintains full discretion as to whether a bonus is awarded and the amount of such bonus. As a result, (in an ideal world) a non-contractual bonus scheme provides employers with full flexibility to decide whether or not a bonus should be awarded. However, ideal worlds are far and few between, and clauses purporting to be non-contractual can often be deemed to be contractual.
The may occur because of poor drafting, as the less clear a non-contractual bonus is, the more likely its meaning will be scrutinised. To overcome this issue, it is important that detailed consideration is given to the implementation of a bonus scheme and that legal advice is obtained before clauses are inserted into employment contracts.
A further issue can arise where a discretionary bonus is paid on a regular basis, as this may result in it becoming contractual by way of custom and practice. An example of this was shown in Noble Enterprises v Lieberum, where the Employment Tribunal concluded that Mr Lieberum had a reasonable expectation that he would receive a bonus, given that the bonus had been consecutively paid for the previous five years. The best way for employers to overcome this issue is again to ensure contractual clauses and policies are clear on the discretion an employer maintains. As a failure to provide clear written terms, coupled with a historical practice of paying a set bonus at regular intervals, is likely to be fatal for any employer seeking to maintain that their bonus scheme was always awarded on a non-contractual basis.