Determining whether a bonus is payable (in part or at all) to an employee who has been absent from work on maternity leave is a complex issue, and failure to make or pro-rate a bonus payment to an employee on maternity leave could possibly give rise to a breach of contract, sex discrimination (less favourable treatment on the grounds of pregnancy) and/or a pregnancy related detriment claim and a equal pay claim.  In light of the potential legal exposure, employers need to carefully consider their reasons for either withholding or pro-rating bonuses to employees on maternity leave.

Factors to be considered:

To determine an employee’s eligibility to a bonus during maternity leave the following factors should  be considered:

1. Is the employee on Ordinary Maternity Leave or Additional Maternity Leave?

During Ordinary Maternity Leave (OML), an employee is entitled to all contractual rights and benefits which would have applied to her, had she been at work, except for the terms relating to her remuneration/contractual monetary benefits.  The relevant forms of legislation do not define “remuneration” but it is generally taken to include sums that are payable by way of wages or salary.   An employee on Additional Maternity Leave (AML) is entitled to much more limited rights under her employment contract, which again specifically do not include remuneration or employment-related contractual benefits.

2. When can an employee bring a sex discrimination/equal pay claim

A bonus which is regulated by an employee’s contract of employment falls outside of the scope of protection against discrimination under the Sex Discrimination Act 1975.  In such circumstances, the employee can still however bring a claim for the non-payment or the pro-rating of a bonus whilst on maternity leave under the Equal Pay Act 1970.

Where a bonus is genuinely discretionary an employee could possibly bring a sex discrimination claim against her employer, if the employer exercises its discretion in an arbitrary or perverse manner.

3. Does the bonus constitute remuneration?

A bonus is likely to constitute remuneration if it is paid in recognition of work undertaken, paid as part of an employee’s salary (i.e. through the payroll system) and is subject to deductions of tax and national insurance contributions in the usual way, as well as being pensionable.

4. Is the bonus contractual in nature?

A bonus will be contractual if it is clearly set out in the contract as payable even if certain conditions apply. An employee’s entitlement to a bonus can become a contractual term by way of custom and practice (even if defined as discretionary), for example if the bonus scheme has been in operation for a significant period of time and is paid out on a regular basis and the employer intends it to be paid e.g. annually.

5. Is the bonus discretionary?

It is increasingly difficult to prove that a bonus is genuinely discretionary.  Where the entitlement to a bonus is set out or referred to in contractual documentation, or there are clear eligibility or calculation provisions, the courts are now likely to hold that the entitlement to bonus is, in fact, contractual, regardless of the fact that the bonus is expressed to be discretionary, as shown in the case of Horkulak v Cantor Fitzgerald [2004].  Although the bonus may in reality be contractual, the amount of the bonus can still be at the employer’s discretion (please see below).

6. Exercise of discretion

In practice, the discretionary element is quite often confined to the amount of the bonus (where the calculation provisions are not set out) rather than to the eligibility to the bonus.  An employer must exercise any discretion regarding both the eligibility and amount of a bonus in good faith, and not irrationally or perversely.

A decision to pro rate (or not pay at all) a discretionary bonus could amount to sex discrimination or unequal treatment.  In GUS Home Shopping Limited v Green and McLaughlin (2001), the EAT upheld the tribunal’s decision that it was direct sex discrimination to refuse to pay a discretionary loyalty bonus to two employees on the grounds of their absence due to pregnancy.  The case did not refer to leading judgments on this matter, and many commentators contend that the case is largely confined to its own facts.   There is however the possibility that an employee on OML would be entitled to full payment of a discretionary bonus as it would not constitute “remuneration”, if the employee can establish that the exercising of discretion in the provision of the bonus  was in some way discriminatory.

7. Is the bonus performance related, and if so can you pro-rate the bonus?

A performance related bonus can measure “performance” in many different ways, for example, on the employer’s performance as a whole, the individual’s/team’s performance against a certain criteria or on the employee’s attendance record.

Where a contractual bonus is paid in recognition of the performance of the business as a whole, and on an individual’s attendance record, the Employment Appeal Tribunal (EAT) decision in Hoyland v Asda Stores Ltd (2005) states that such bonuses can be pro-rated to reflect to time actually worked by the employee.  In the Hoyland v Asda case, the EAT confirmed that where a contractual bonus was paid to reward employees for work already performed and their continued contribution during the year, pro-rating that bonus to reflect the period when an employee is absent on maternity leave does not amount to sex discrimination or pregnancy related detriment.   It held that the bonus payment amounted to “remuneration” (explained above) which was not a benefit to which the employee was entitled during OML.  Following this case, with the exception of the two week period of compulsory maternity leave, employers can pro-rate contractual bonuses to reflect periods of maternity leave absence from work.

Where a contractual bonus is based on individual performance, the employee’s actual performance when in work during the bonus year should be considered carefully.

8. Is the bonus non-performance related?

If a bonus is not related to performance at all, and is paid, for example, to encourage future loyalty and to incentivise staff, the courts have held that such a bonus would not be payable during maternity leave but only if the bonus is subject to an eligibility requirement that the employee must be in active service at the time the bonus is payable (European Court of Justice decision in Lewen v Denda [2000]).  Where there is no such eligibility requirement, it may be possible for an employee to argue that a bonus should paid to an employee on OML (although there is no case law on this point as yet).

9. What has been communicated to the employee?

It is important that employers have a clear policy on the payment of bonuses to employees on maternity leave (taking into account the legal points raised above), to ensure that a consistent approach is adopted to minimise the risk of claims.  Managers and human resources should liaise together to ensure that such a policy is communicated to employees.  Failure to apply such a policy consistently, or a manager making promises to an employee which is contrary to the employer’s standard policy could lead to an employee alleging breach of contract and/or breach by the employer of the implied term of trust and confidence.

Summary

Employers need to tread carefully when deciding on the nature and operation of their bonuses for those on maternity leave to avoid the numerous legal pitfalls. It is important that employers consider how their practices work in reality to ensure that a consistent and considered approach is adopted, in accordance with the current case law.  An employer is less likely to be at risk of litigation if it adequately compensates high performers, irrespective of whether they have been on maternity leave.   Employers should take into account that employees on maternity leave may rely on the extra income from a bonus, and the failure to pay a bonus or provide a low bonus is likely to cause unhappiness, and may encourage an employee to become litigious.   Bonuses are contentious issues – particularly at this time of year and in the current market – and so it is best that employers get their ducks in a row at an early stage rather than waiting to see how employees react to bad news…


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