In many industries an annual bonus has become a key part of an employee’s remuneration package. In the current economic climate, local businesses are looking to cut costs wherever possible. With RBS recently electing to defer its bonus arrangements, many employers are now considering following suit, and are looking at the possibility of reducing, deferring or even withholding employee bonuses. Employers should be aware, however, that alterations to bonus arrangements can usually only be made without consent where they are genuinely “discretionary” in nature. Attempting to change a bonus scheme that is or has become a contractual right can land the employer in hot water.

Employee bonus schemes fall into three categories:

• Genuinely discretionary schemes, whereby the employer has complete discretion as to how much to pay, when, and even whether to pay at all. As stated above, such schemes can be amended or withdrawn without consulting with the individual employees, although the employer may wish to undergo some sort of consultation as a matter of course.

• Partially discretionary schemes, whereby employees have the right to receive the bonus (whether by way of an express right or a developed custom and practice of the business) following the achievement of prescribed criteria that are routinely applied (such as performance targets), but the amount is at the employers’ discretion.

• Purely contractual schemes, which can only be lawfully amended after employee consent has been obtained. This will involve a process of consultation, but at the present time employees may be willing to accept changes in order to avoid redundancies.

Difficulties tend to arise mainly in respect of partially discretionary bonus schemes, since the extent or even existence of any contractual right is usually unclear. This most often arises where the employer has awarded the same type of bonus on a regular basis for a long period of time, and employees have come to rely on it. Whilst employers may continue to see such awards as discretionary, the employees may argue they have become an implied contractual right by operation of custom and practice.

The question of whether a bonus is purely discretionary has been the subject of many legal disputes and in the current climate, employers will not want to incur additional costs by disputing such matters Accordingly, it is recommended that any employer seeking to withhold or defer bonus payments obtains early legal advice.


Harriet McInnes is a Solicitor specialising in employment law at Howes Percival LLP’s Norwich office.