Scrapping a bonus scheme

25 April 2019

This article was featured in the May 2019 issue of the magazine.

Danny Done, managing director at Portfolio Payroll, sets out the implications of and procedures for removing an employee bonus scheme 

At the end of the tax year some businesses prepare to issue staff with their annual bonus. Providing these bonuses can often be a costly exercise and, although it is unlikely to go down well with staff, scrapping an employee bonus scheme can sometimes be a necessary way to save money during difficult times and avoid having to consider a more unpleasant solution. 

Whether or not you can remove your bonus scheme will depend on a number of factors and you first need to consider whether the scheme is contractual or discretionary. This can often be determined by reviewing the wording used in employee contracts or in any existing bonus policy.

If these explicitly state that you reserve the right to withhold bonuses as you see fit, then the scheme is likely to be discretionary. This means you are not legally required to pay staff and should be able to proceed without fear of tribunal proceedings. In this scenario it is advisable to provide staff with sufficient notice that they will no longer be receiving their bonus in order to reduce any potential disappointment. 

Having said this, staff may be able to argue that the bonus has become an implied contractual term under certain circumstances which would make withholding payment significantly more difficult. For it to qualify as an implied term, employees will need to show that bonus payments have been made regularly and without fail for some time and therefore have come to be expected. Proceeding to remove the bonus scheme in these circumstances could lead to claims for breach of contract; however, this will depend on the specific facts of the case. 

Alternatively, if the bonus scheme is a contractual entitlement you have less freedom to remove it immediately and should first enter into a consultation period with staff with the intention of amending their contractual terms. During this consultation you should explain to staff exactly why you wish to remove the bonus scheme with the aim that they agree to this change. 

Perhaps understandably, getting employees to agree to give up their contractual bonus may be difficult. In these situations, you may be faced with no option but to enforce the change by dismissing employees on their current terms and re-engaging them with the change enacted. If you choose to proceed in this way, then you must be able to present a valid business reason for removing the bonus to avoid claims of unfair dismissal. 

...if the bonus scheme is a contractual entitlement you have less freedom to remove it immediately...


Once existing employee contracts have been successfully amended you should ensure continuity by reflecting this change in workplace policies and providing future new starters with updated contracts that outline your new stance on employee bonuses. 

Having said this, whilst removing your bonus scheme may save some money in the short-term you may want to think twice before proceeding and consider the additional cost this could have on employee morale. Many firms offer bonus schemes as a part of a competitive benefits package and removing this could cause discontent to spread amongst your workforce, impacting productivity as a result. Although staff are unlikely to leave simply because you choose to revoke their regular bonus it may be a contributing factor for some and impair your ability to recruit and retain top talent.

To counter this, you could choose to replace your employee bonus scheme with less costly alternatives that still provide a benefit to your staff. This could vary from subsidised gym subscriptions and travel passes to extra days of annual leave or a more open approach to flexible working. It would be wise, before making this decision, to hold a discussion with staff to find out which benefits would be more desirable from their point of view. 

Ultimately, although staff may argue the contrary, it is possible to make changes to an existing bonus scheme even when this is included in contracts of employment. However, when doing so it is imperative that you proceed with caution, considering the impact this may have on staff, and ensure you follow the correct procedure at all times.