Bonuses: Key considerations for employers

In our alert we explore these questions in relation to the following jurisdictions:

• United Kingdom
• France
• UAE
• Hong Kong
• Singapore

  
United Kingdom

1. Are employers permitted to award discretionary bonuses? If so, how should they exercise their discretion?

Yes, employers are permitted to award discretionary bonuses. A bonus scheme may provide for the employer to have absolute discretion or partial discretion as to whether to consider an employee for a bonus and the amount of any bonus. The discretion may include a number of elements, for example whether the scheme will operate at all, the calculation and/or quantum of any awards, performance targets, relevant time periods for assessing performance and payment of any award. 

There has been a substantial amount of case law surrounding discretionary bonuses and the duties concerning exercise of an employer’s discretion. These include the duty:

• to exercise discretion honestly and in good faith; 
• not to exercise discretion in an arbitrary, capricious or irrational way; and
• not to breach the implied term of trust and confidence.

2. Can bonus payments be deferred?

Yes, bonus payments can be deferred and the terms concerning how the deferral will operate are typically set out in the relevant bonus documentation. Bonuses, and any deferred elements, may be delivered by way of cash or shares or a combination of both elements.

In the UK there are specific rules for regulated firms in the financial services sector, which include requiring certain awards to be deferred for specified time periods.

3. Can employers clawback bonus payments in any circumstances? If yes, how is it enforced by employers?

Yes, it is legally permissible to include clawback provisions within bonus plans. Often such clauses provide that the entire bonus or part of it must be repaid in certain circumstances e.g. if it is a sign-on bonus it may be subject to a clawback provision if the employee leaves employment within a certain time period after joining, or for performance bonuses there may be clawback provisions if the employee commits an act of gross misconduct.

To maximise the enforceability, the clause needs to be drafted carefully to avoid successful arguments from the employee that the repayment clause is void as a penalty clause, an unlawful restraint of trade or is a breach of the employer’s duty of trust and confidence. Enforcement would be through the civil court.

It is often difficult to enforce a clawback clause as this involves an individual paying back sums already received or transferring back shares. In order to maximise the chances of a clawback provision being enforceable employers should incorporate the clawback recovery arrangements into the relevant plan rules and/or the terms of an individual’s award. Given the potential difficulty of enforcing clawback clauses, some employers may opt for deferral arrangements as an alternative.

It’s worth noting that listed companies have duties in respect of clawback under the UK Corporate Governance Code which contains best practice recommendations in relation to executive pay, including recommending clawback clauses in particular circumstances.

4. What impact does the termination of employment have on bonuses?

It is common to include provisions in a contract of employment or in any bonus documentation that a bonus is conditional on the employee being in employment and not under notice at either the end of the relevant financial year or at the date the bonus payment would otherwise be made. More generous schemes may provide that a pro-rata bonus may be payable on termination.

Most schemes will also distinguish between good leavers and bad leavers. For example, an employee who leaves because of ill-health or redundancy may qualify as a “good leaver” and be eligible for all or part of any bonus awarded. This would differ from a “bad leaver”, for example someone who has been dismissed for misconduct, who would not be entitled to any bonus. 

5. What key issues commonly arise in relation to bonuses?

Whilst many employers operate non-contractual discretionary bonus schemes, if an employee is regularly awarded a discretionary bonus and has a reasonable expectation that they will receive a bonus, they may seek to argue it has become contractual through custom and practice. In the context of discretionary bonuses, where an employer has failed to exercise its discretion in good faith an employee can bring a claim for damages.  The damages are assessed on the level of bonus that would have been awarded if the employer had exercised its discretion in good faith (rather than the lowest level of bonus that could have been awarded).

Other common claims in relation to bonuses are unlawful deduction of wages claims and breach of contract claims. Where bonuses are contractual, any change to a contractual bonus scheme typically requires employee consent.

Failure to a pay a bonus, or the quantum of any bonus, can give rise to discrimination claims. For example, there have been cases where substantial discretionary bonuses have been awarded to male employees and a female employee has received a significantly smaller amount and claimed sex discrimination. Such situations can also give rise to equal pay claims. In addition, issues can arise concerning bonus payments for employees on maternity leave or on long-term sick leave as well as any difference in treatment for fixed-term or part-time workers.

The above represent just a handful of the issues that can arise. Please do get in touch if you require further information.

France

1. Are employers permitted to award discretionary bonuses? If so, how should they exercise their discretion?

French case law is very strict on payment of bonuses and gives rise to a lot of litigation.

If the allocation of bonuses is specified in the contract, it is necessary for the employer to set the conditions for allocation of the bonuses and it must be an objective criteria. The targets must be independent of the employer's will and objective (Cass. soc., 17 October 2007, n°05-44.621, Cass. soc., 9 May 2019, n°17-27.448) and be set within the time limits set by the contract or, failing that, at the beginning of the financial year (Cass. soc., 9 May 2019, n°17-20767). Otherwise, the bonus is fully due to the employee.

However, the employer is always free to pay a discretionary bonus outside of any contractual provision.

Care must be taken to ensure that the reasons for paying the bonus to some employees and not to others can be justified, at the risk of violating the principle of equality between employees. It can be justified by overperformance for instance.

Lastly, the recurrent payment of the same amount of a discretionary bonus in relation to the same objectives may constitute an “usage”. The usage makes the bonus becoming contractual. 

2. Can bonus payments be deferred?

Article L 3242-1 of the French Labour Code provides that remuneration is paid once a month.  Bonuses, because of the way they are acquired, may be paid at a different frequency (Cass. soc. 25 February 1988 No. 84-41.288)

A mandatory bonus instituted by the employment contract, the collective agreement or the company agreement provides a periodicity for its payment. The employer must therefore respect this periodicity. If not, the non-payment of the bonus on its due date may be considered as a breach of the employment contract.

It has been ruled that an employee is entitled to terminate his employment contract if the employer has failed, without justification and despite persistent claims, to pay the employee his full variable remuneration and expenses on time (Cass. soc., 25 Apr. 2007, no. 05-44.903)

3. Can employers clawback bonus payments in any circumstances? If yes, how is it enforced by employers?

In France, when an employee is entitled to the payment of his bonus for having met his targets, it is due to him. An employer cannot legitimately take back an employee's bonus.

Indeed, this would be considered a financial penalty prohibited by Article L. 1331-2 of the Labour Code.

However, the PACTE Act of 22 March 2019 has created an exception to Article L. 1331-2 of the Labour Code for traders (only for traders). Indeed, the "PACTE" Act introduced Article L. 511-84 of the Monetary and Financial Code, which states that "the total amount of variable remuneration may, in whole or in part, be reduced or give rise to restitution" if "the person concerned has disregarded the rules laid down by the institution with regard to risk-taking".

On one hand, this article expressly states that it constitutes a derogation from the principle of the prohibition of financial penalties set out in Article L. 1331-2 of the Labour Code.

On the other hand, recourse to this sanction may be taken against the employee "in particular because of his responsibility for actions that have led to significant losses for the establishment or in the event of failure to comply with the obligations of good character and competence".

4. What impact does the termination of employment have on bonuses?

Case law states that a clause in the collective agreement, a company agreement or a clause inserted in the employment contract may be subject the payment of the bonus to the presence of the employee on the day of its allocation.

Nevertheless, in the absence of such a provision, the Supreme Court considers that the employee is entitled to obtain payment of his variable remuneration prorata temporis , in proportion to the time spent within the company during the year concerned by the allocation of the variable remuneration (Cass. soc. 15 March 2017 n°16-19.258; Cass. soc. 13 Feb. 2013 n°11-21.073).

Thus, even when the departure of an employee is prior to the payment date of the variable remuneration, the latter cannot be deprived of an element of his remuneration to which he is entitled in proportion to his time of presence (Cass. soc. 23 March 2011 n°09-69.127)

5. What key issues commonly arise in relation to bonuses?

It is common for bonuses to be contested, particularly because of (i) default to set the targets; (ii) date of communication of the target, and (iii) fact not to draft the target set in French language.

First, the inclusion of a bonus in the employment contract requires the employer to communicate these targets to the employee at the beginning of the fiscal year. If the employer does not set the employee's targets within the timeframe stipulated in the employment contract, he must pay the full amount of bonus (Cass. soc. 25 November 2020: n°19-17246).

Secondly, the objectives must be reasonable, realistic, and achievable. This means that the objectives must be compatible with the market, considering the economic situation of the professional sector in which the employee works (Cass. soc. 13 March 2001, no. 99-41812).  Otherwise, the clause is not valid. It depends on the wording of the clause, but the employer can set the objectives on his own and is not obliged to negotiate them with the employee (Cass. soc., 17 Dec. 2003, no. 01-44.851).

Finally, in principle, any document containing obligations for the employee or provisions that are necessary for the performance of his work must be drafted in French (C. trav., art. L. 1321-6; Cass. soc., 2 Apr. 2014, no 12-30.191). It has been ruled that the employer cannot refer to documents setting objectives in a foreign language, even if the employee is proficient in it (Cass. soc., 2 Apr. 2014, no. 12-30.191).

The targets must be written in French even if the company has an international activity (Cass. soc., 3 May 2018, no 16-13.736). However, the targets may be written in English if a translation is quickly provided (Cass. soc., 21 Sept. 2017, no 16-20.426).

UAE

For the purpose of the UAE element of this alert, we have focused on the legal requirements that currently apply to private sector employers and employees who are subject to Federal Law No. 8/1980 (the “Labour Law”) which will be replaced by Federal Law No. 33/2021 from 2 February 2022 (the “New Labour Law”), the Dubai International Financial Centre (“DIFC”) Employment Law, DIFC Law No.2/2019, and the Abu Dhabi Global Market (“ADGM”) Employment Regulations 2019. The responses below are based on these laws. However, in the common law jurisdictions of the DIFC and ADGM, English case law will be persuasive and so the information in the responses under the UK section of this alert are also relevant.

1. Are employers permitted to award discretionary bonuses? If so, how should they exercise their discretion?

Yes, discretionary bonuses are a common feature of employment remuneration practices in the UAE. There are no statutory restrictions on the award of bonuses in any of the primary employment laws in the various jurisdictions within the UAE and only limited references or inferences to bonuses in the laws themselves. For example, the New Labour Law alludes to the concept of bonuses in the definition of "Wage", which is defined to include, inter alia, amounts paid in return for efforts exerted by employees; and in the obligation imposed on employers to put in place internal work regulations, including regulations regarding promotions, bonuses and benefits. Bonuses, along with (inter alia) other incentives, grants and profit shares, are expressly included in the DIFC Employment Law definition of "Additional Payments" (which, together with "Wages" – essentially, salary and allowances – comprise a DIFC employee's overall "Remuneration"). Both the DIFC Employment Law and the ADGM Employment Regulations expressly exclude bonuses from their respective definitions of "Basic Wage".

The determination of bonuses is therefore a matter of contractual arrangement between employer and employee.

In the event of a dispute regarding the exercise of an employer's discretion over an award of bonus, a civil UAE court will consider, in line with UAE civil law principles that the intention of the parties is determinative. There is scant reported civil case law regarding the operation of discretionary bonuses and so, whilst the conventional wisdom is to say as little as possible in the employment contract that might fetter any discretion, it can be helpful to provide some clarity in the contract (or separate bonus documentation) about the intention of the parties regarding the degree and scope of the discretion. For example, whether discretion applies in respect of operating the scheme as a whole; in respect of each performance period; the calculations and/or the timing of assessment and payment; and in relation to arrangements on termination. In the DIFC and ADGM courts, regard will be had to English common law principles established through case law regarding the degree, scope and legality of the exercise of any contractual discretion. See, for example, the Court's reasoning on the exercise of discretion (albeit in the context of inflation-linked increases to allowances rather than bonuses), in the DIFC Court of Appeal decision in John Vitalo v Atlas Mara Management Services Limited [2019] DIFC CA 012(23 March 2020).

2. Can bonus payments be deferred?

Yes, payment of some or all of an employee's bonus may be made contingent on certain conditions, including set deferral periods. For example, in the DIFC, there are a number of regulatory and statutory tools to facilitate this. With the introduction of a new DIFC Employment Law in 2019 came an amendment to the strict obligation on employers to make payment of all "Remuneration" within seven days after the end of the relevant "Pay Period" (as those terms are defined in the DIFC Employment Law). The amendment provided an exception to that rule for any "Additional Payments" (which, as explained above, includes bonuses) that are deferred, or made subject to any other conditions, by written agreement between the employer and employee. Further, financial services employers in the DIFC who are regulated by the Dubai Financial Services Authority ("DFSA") are specifically encouraged to consider using deferral in the operation of variable pay arrangements. Guidance in the DFSA Rulebook regarding performance-related bonuses states that employers should ensure that there are appropriate adjustments for the material ‘current’ and ‘future’ risks associated with an employee's performance, and that where the measurement of performance cannot be set in a multi-year framework, employers should provide for the deferral of vesting, or retention, or clawback, of bonus as appropriate. For employers governed by the Labour Law/New Labour Law, there are no statutory restrictions on the deferral of bonuses. In most cases and jurisdictions, it will be prudent to set out the terms of deferral within the rules of the bonus scheme, or the employment contract where there are no dedicated rules. 

3. Can employers clawback bonus payments in any circumstances? If yes, how is it enforced by employers?

Yes, clawback of bonus may be used by employers as there are no statutory restrictions from doing so. For example, in the DIFC, employers regulated by the DFSA are required by the regulator to consider using clawback as a potential mechanism to manage employee risk-taking behaviour. However, it is acknowledged that there are practical drawbacks to exercising clawback provisions considering the high proportion of the UAE population that is made up of globally mobile expatriate employees who may not always remain in the jurisdiction long enough to face enforcement of clawback. For that reason, many employers will prefer mechanisms like deferral and malus to restrict and manage bonus entitlements as the necessary assessment can be made before payment is made. In the DIFC, ADGM and other common law jurisdictions, including the UK, making bonuses contingent on the satisfaction of pre-agreed conditions, rather than being subject to clawback or forfeiture in the event of any breach by the employee (for example, breach of a post-termination restrictive covenant), can also help guard against arguments that the clawback/forfeiture provisions may amount to unenforceable penalty clauses.   

4. What impact does the termination of employment have on bonuses?

The confirmation and payment of bonus entitlements on termination will be subject to the contractual terms and intentions set between the employer and employee. Where and employee leaves part-way through a bonus year and the contract is silent on how bonus should be dealt with in that scenario, employees employed within the ambit of the Labour Law/New Labour Law are likely to find favour with an argument that they are entitled to at least a pro-rata entitlement, especially where the bonus is paid as a reward for performance. For that reason, the conventional wisdom is to clarify the position within the employment contract, such as stating that payment will only be made where an employee remains employed at the date of assessment and/or payment and where performance conditions have been satisfied. Whilst the same good practice would also apply in the DIFC and the ADGM, the respective courts may be more receptive to an appeal by an employer to more closely inspect the purpose of the bonus arrangement, so that where the operation of a bonus scheme is primarily intended to incentivise retention (rather than to reward performance), it may be arguable that an employee leaving part-way through the retention period should not benefit from a bonus. 

5. What key issues commonly arise in relation to bonuses?

Disputes often arise around the discretion that has been exercised in the award of bonus in a given year, particularly following turbulent economic periods (such as during the COVID-19 pandemic) where the employer's overall financial performance may have suffered despite the best efforts of employees. Typically, such contention will have followed years of consistent bonus payments such that an employee will contend that the discretion exercised in respect of the disputed award is unlawful. As noted above, in the DIFC and ADGM courts, regard will be had to English common law principles established through case law regarding the degree, scope and legality of the exercise of any contractual discretion. There is precedent in the UAE courts (outside the DIFC/ADGM) of finding that where there has been a practice of regularly paying a consistent amount in bonuses, an employee may be considered as entitled to receive a bonus as a guaranteed element of pay, even if each individual award was made on the premise that the employer had exercised its discretion to do so. In the past, this will have had consequences for the calculation of termination benefits and, specifically, end-of-service gratuity. End-of-service gratuity is expressly stated to be calculated on the basis of Basic Wage which, in the Labour Law, was simply defined as the contractual wage exclusive of allowances, which gave the courts scope to find that guaranteed and regular payments (including bonuses) should be included in Basic Wage. The New Labour Law introduces an amended definition of Basic Wage which expressly excludes from the definition of Basic Wage any benefits-in-kind and amounts paid in return for employee efforts exerted. Therefore, to limit the risk  of the type of dispute discussed above, employers governed by the New Labour Law should consider expressly linking bonus awards and payment to achievement of individual performance targets within the employment contract and related bonus documentation, and making it clear that the parties do not intend for any bonus payments to form part of Basic Wage. As noted above, both the DIFC Employment Law and the ADGM Employment Regulations expressly exclude bonuses from their respective definitions of "Basic Wage", meaning that bonuses should not feature in the calculation of end-of service gratuity in either the ADGM or the DIFC or, in the DIFC alone, the calculation of contributions to be paid into the DIFC's Employee Workplace Savings Scheme ("DEWS"). 

Hong Kong

1. Are employers permitted to award discretionary bonuses? If so, how should they exercise their discretion?

Employers are permitted to award discretionary bonuses in Hong Kong.

When exercising any discretion this is not unfettered. Accordingly, employers must not act in a way that is unreasonable, they should not be irrational, perverse, or capricious. 

Another factor to take into account when determining a discretionary bonus is whether the bonus is calculated pursuant to a mix of a formula and discretion. For example, it is common for a discretionary bonus to be payable when targets are met with the employer retaining a discretion as to the amount then due. When targets are achieved, even when the bonus is stated to be wholly discretionary, employers must be able to justify the amount of the bonus then paid. They could not lawfully exercise their discretion not to award a bonus.

2. Can bonus payments be deferred?

The payment of bonuses can be deferred in Hong Kong and this frequently happens for staff retention purposes.

Contractual bonuses which are "annual payments", or "annual bonuses" are regulated by Hong Kong's Employment Ordinance ("EO"). Employers are free to designate when such an end of year payment will be paid and the date specified in the employment contract will be respected. If no date is specified however the EO instructs that the bonus be paid within 7 days after the end of the payment period. Therefore, to defer any bonus this needs to be set out in the contract or bonus plan.

3. Can employers clawback bonus payments in any circumstances? If yes, how is it enforced by employers?

A clawback is possible but the employer will only be allowed to do so with a clear legal basis. Relevant factors include:

1. Whether the employment contract contains an express right to clawback, for example, conferring a right to seek a clawback should the employee have engaged in misconduct;
2. In the absence of an express term, whether the employer could rely on any implied term to clawback a bonus; and
3. Whether the bonus paid is purely discretionary. These will be easier to clawback. With respect to contractual bonuses if these are paid following the attainment of any objective formula a claim for the return of the bonus would be unlikely on the basis the employee has met their targets and was entitled to the bonus.

If there is a right to clawback a bonus this right is typically enforced in litigation.

4. What impact does the termination of employment have on bonuses?

Often bonuses are stated to be payable on the condition that the employee remains in employment at the time of payment.

As to whether or not the above term works is dependent on whether:

1. The bonus is contractual and governed by the EO. If so, such term may be void and contrary to the EO which provides that employers need to pay a pro-rated share of a bonus if the employee is dismissed before the payment date provided the employee has worked for more than three months during the bonus period (unless the employee either was summarily dismissed or terminated their employment); or
2. The bonus is discretionary. If so, while the above term may be valid, implied into the employment contract by the common law will be an anti-avoidance term which will be breached by any employer terminating an employee in order to avoid them becoming eligible for a bonus.

5. What key issues commonly arise in relation to bonuses?

Employers failing to pay an end of year bonus governed by the EO on time may find themselves being prosecuted by the Labour Department in Hong Kong's criminal courts. The EO states wilful non-payment of an annual payment or bonus without a reasonable excuse is an offence punishable with a fine of up to HK$50,000.

The bulk of civil claims in Hong Kong are typically about whether the bonus is within the EO, wholly discretionary and whether any employer's discretion has been exercised fairly.

Singapore

1. Are employers permitted to award discretionary bonuses? If so, how should they exercise their discretion?

Employers are permitted to award discretionary bonuses.

Whether a bonus is discretionary or not depends on the construction of a bonus clause in an employment contract.

The employer's discretion as to whether to pay a bonus is an absolute one (see Tan Hup Thye v Refco (Singapore) Pte Ltd (in members’ voluntary liquidation) [2010] 3 SLR 1069). However, there may be some limits to this statement as the High Court in Leong Hin Chuee v Citra Group Pte Ltd [2015] 2 SLR 603 stated (albeit in obiter) that the implied term of mutual trust and confidence could have ramifications on an employer's exercise of his discretion with respect to his awarding of bonuses to his employee.

2. Can bonus payments be deferred?

The details of the annual bonus policy will normally be specified in the employment contract and might involve a deferred bonus plan.

The Singapore courts will, however, not uphold the terms of an employment contract to allow a deferred bonus payment to be ultimately withdrawn in the context of a restraint of trade clause. In Mano Vikrant Singh v Cargill TSF Asia Pte Ltd [2012] 4 SLR 371 ("Mano Vikrant Singh"), the Court of Appeal held that a forfeiture provision operated to restrain the employee from leaving his current employer to join a competitor, by way of a threat to forfeit a substantial financial reward which had already vested in the employee and which was being deferred. However, the Court of Appeal also stated that it would not take issue with a deferred bonus scheme which is not tied to a non-compete clause.

3. Can employers clawback bonus payments in any circumstances? If yes, how is it enforced by employers?

Once the bonus is paid, the bonus cannot be claimed back unless there has been some form of mistake in law.

Where the employment contract allows for it, there is a possibility that employers may clawback bonus payments in the event that the employee resigns shortly after receiving it (and as long as the relevant term does not amount to a restraint of trade clause as in Mano Vikrant Singh).¹

However, where an employee breaches the contract by resigning before the stated time, a clawback clause would appear to be a liquidated damages clause.² The validity of such a liquidated damages clause depends on various factors, such as whether the specified liquidated sum was so extravagant or unconscionable in comparison with the greatest loss that could conceivably result (as judged at the time of making the contract), and whether it is a single sum or varying sum.³

If the employers can in fact clawback bonus payments, the employer should not clawback this amount from the employee's salary unless the employee has given written consent for the employer to do so. To do so without the employee's written consent would be a breach of section 26 of the Employment Act read with section 27 of the Employment Act.

4. What impact does the termination of employment have on bonuses?

Interpretation of the contractual terms in an employment contract is essential in determining the effect of termination on payment of bonuses.

In respect of guaranteed bonuses, if the employee has given notice, but still remains in employment on the date the guaranteed payment was to be made, the employee would be entitled to it unless the employment contract provides it would be forfeited.

Where the employer terminates the employee’s contract solely with the intention of not paying a guaranteed bonus, there is a possibility the Singapore courts may still determine if the termination was motivated by bad faith, even if there was an express termination clause.⁴

5. What key issues commonly arise in relation to bonuses?

As it stands, the Singapore courts’ affirmation of the employer’s absolute discretion over the payment of bonuses represents a major hurdle for employees who wish to bring a claim against their employers. The concern seems to be with providing employers with sufficient flexibility to preserve the many permutations of bonus schemes which they can set up.⁵

Disputes over bonuses are also common in the context of restraint of trade, as can be seen in Mano Vikrant Singh. It is therefore important that employers should pay special attention to the drafting of bonus payment clauses that are designed to entice prospective employees and/or keep them with the employer.

The Singapore law aspects of this article were written by Jason Yang and Christine Ong of Virtus Law LLP (a member of the Stephenson Harwood (Singapore) Alliance).

¹ Ravi Chandran, “Bonuses (and Other Payments) in Employment” [2012] 24 SAcLJ 338 at [34].

² Ravi Chandran, “Bonuses (and Other Payments) in Employment” [2012] 24 SAcLJ 338 at [34].

³ Ravi Chandran, “Bonuses (and Other Payments) in Employment” [2012] 24 SAcLJ 338 at [34].

⁴ Ravi Chandran, “Bonuses (and Other Payments) in Employment” [2012] 24 SAcLJ 338 at [34]. See Latham at [42]-[53].

⁵ Mano Vikrant Singh at [48].