Employment Solicitor Martin Malone discusses this vitally important but frequently overlooked topic.
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Many people believe that the employment contract is sacrosanct and cannot be varied in any way by the employer. Not so, in fact contractual variations are quite common whether imposed by the employer, negotiated between employer and employee or as part of a promotion or change in pay or bonus structure. The contract of employment is an ever-changing and evolving framework which governs your working life and it is vital that when changes are to be made, legal advice is sought.
By instructing an employment lawyer at Canter Levin & Berg, you can ensure that you are fully advised as to the legality of the changes to the contract and the effects of those changes on your core terms such as pay and benefits. We can advise and represent you in negotiations with your employer. If you have been promoted and need an independent legal expert to review a new contract and new role, our lawyers are on hand to ensure that you are able to start your new position in the best possible position.
The areas that we most frequently advise on in respect of contractual terms are:
Bonus structures can often be complex documents held externally to the main contract of employment but having direct and significant contractual effect in the remuneration of an employee. It is not uncommon for employees in the financial services sector to enjoy bonus payments well over 100% of salary and bonus payments to executive board members of AIM and FTSE listed companies are often up to 100% based upon the performance of the business. Since the peak of the financial crisis in 2007/2008, many top businesses have decided that rewarding success should be the aim of an employment contract, hence the increasing prevalence of high percentage bonus schemes as opposed to a high level of guaranteed remuneration in the form of a basic salary. Bonus schemes increasingly utilise share options or shares themselves as rewards. This trend makes it even more important for employees to take legal advice at the beginning of employment as financial planning for an employee and their family can depend upon fully understanding the nuances of a particular bonus scheme.
Because schemes are routinely changed, we often give advice on the effects and legality of those changes. In most cases, the contract sets out the criteria used by the employer in deciding whether the employee will receive a bonus. It is normal only to pay the bonus if the employee remains in employment for the full year against which his performance is to be judged. As the bonus is to provide an incentive for him to perform well it is common to give a general indication of the performance criteria that will be used by the employer.
Sometimes the bonus is decided at the absolute discretion of the employer. Where the employer reserves an absolute discretion to pay a bonus, a disappointed employee cannot claim that he has a right to be paid. However, where the employer sets out the criteria upon which the discretion is to be exercised the employee may be able to challenge the employer's decision on the ground that the decision has been exercised arbitrarily, capriciously or inequitably.
It has also been held that the failure to pay a discretionary and non-contractual bonus was an unlawful deduction of wages under the Wages Act 1986. (The provisions formerly contained in the Wages Act are now contained in the Employment Rights Act 1996 (ERA).) The employee was held to have an expectation that the bonus would be paid. If the criteria for payment are set out in the Handbook this helps to modify what the employee can argue were his expectations.
A clause which entitles the employee to commission payments should make clear on what commission is to be paid (e.g. in the case of a salesman, is it on orders placed with the employer, orders which the employer actually executes or orders for which the employer is paid?); at what rate; when it becomes due; and how frequently it is paid. An employee who receives commission in advance normally has to repay any part of it which has not been earned when his employment comes to an end.
Non Salary Pay Reviews (in General)
With regards to fixed salary and bonus/commission the key issues are:
- (a) to make clear which elements of remuneration are fixed and which are fluctuating;
- (b) to set out the arrangements for reviewing pay.
As to (a), fixed salary needs to be clearly distinguished from bonus or commission. Any guaranteed minimum bonus/commission and any time limit on the validity of this guarantee should be clearly specified. The status of bonus/commission as contractual or discretionary should also be stated. An employee will have no legal claim to discretionary bonus, at least until one has been declared in his favour.
Contractual bonus/commission arrangements should, among other things, specify when payment will be made and what happens if an employee leaves before payment is due.
Employees should be aware of potential escape routes which would enable cancellation and replacement of schemes.
The other key issue is salary reviews. Employees expect their contracts to provide for regular reviews, at least. Some employees may negotiate for guaranteed increases, usually linked to the Retail Prices Index, to maintain the spending power of their salary. A promise to review is just that - it is not a promise to increase, just to reconsider the amount of pay. Failure to carry out a review in a reasonable time or without giving the matter due consideration could be a breach of contract, so a promise of an annual review cannot be taken lightly.
Equally a review clause does not allow an employer to reduce basic salary; a specific power in the contract would be necessary for this.
Specialist Advice and Representation
We have a great deal of experience in dealing with complicated employment law issues. Canter Levin & Berg has been providing advice to employees for over 30 years so we've seen and dealt with most employment scenarios.
We offer free initial legal advice so call us now on 0800 169 5004 or contact us through this website and we will call you back.