Definition
A structured compensation arrangement in which employees receive additional payments above their base salary, typically linked to individual performance, team results, or company profitability.
UK Context
UK employers must include regular bonus payments in holiday pay calculations for the first four weeks of statutory leave, following the Bear Scotland ruling. Bonus payments are subject to PAYE tax and Class 1 NICs. The distinction between contractual and discretionary bonuses has significant legal implications. The Financial Conduct Authority regulates bonus schemes for certain financial services employees under the Senior Managers and Certification Regime.
Best Practices
- Clearly document whether the bonus scheme is contractual or discretionary in employment contracts and scheme rules
- Set measurable, achievable targets that align with business objectives and are within the employee's control
- Include the bonus in holiday pay calculations where it is paid regularly, in compliance with the Bear Scotland ruling
- Review the scheme annually to ensure it remains competitive, affordable, and aligned with business strategy
- Communicate the scheme clearly so employees understand how their bonus is calculated and when it is paid
Frequently Asked Questions
What is the difference between a contractual and discretionary bonus?
A contractual bonus is one that the employer is legally obligated to pay if the specified conditions are met. A discretionary bonus is one that the employer may choose to pay at their discretion. The distinction depends on the wording of the contract and scheme rules, and courts will look at the substance rather than just the label.
Are bonuses included in holiday pay?
Yes, following the Bear Scotland v Fulton ruling, regular bonus payments that are intrinsically linked to the performance of tasks must be included in holiday pay calculations for the first four weeks of statutory leave (the EU-derived entitlement under Regulation 13 of the Working Time Regulations).
Can an employer withdraw a bonus scheme?
If the scheme is discretionary, the employer can generally withdraw or amend it, although they should consult with employees first. If the scheme is contractual, changing it requires the employee's agreement or a formal variation of contract process. Unilateral changes to contractual terms can constitute a breach of contract.