How Redundancy Affects Bonuses

In some jobs a significant part of the employee’s remuneration will come through bonus payments. These are usually paid on either a monthly or yearly basis, and can either be based on precisely defined criteria, such as the number of sales made in a given time period, or awarded by the employer on an unspecified discretionary basis.

In a redundancy situation, several complex questions arise in relation to bonuses.

Bonuses and Redundancy Pay

The standard way of computing an employee’s entitlement to redundancy pay, whether at the minimum statutory level or a more generous contractually-specified payment, is based at its core on the number of weeks worked multiplied by the employee’s gross weekly earnings, modified by the employee’s age. If a worker is paid a fixed regular amount which is occasionally or even regularly supplemented by variable bonus payments, the obvious question is whether the variable bonus payments should be included in the weekly pay calculations and, if so, on what basis. The answer is yes. Where an employee has a constantly varying rate of pay, the normal procedure is to take the average hourly pay in the 12 weeks leading up to redundancy multiplied by the normal working hours in a week, and use that as the basis for calculations.

Annual Bonuses and Redundancy

If bonuses are paid on an annual rather than weekly or monthly basis, the procedure outlined above may clearly be inadequate. How annual bonuses will be handled in the event of redundancy may be specified in your contract of employment. If it is not, many employers will offer a pro rata payment for the part of the year already completed before your employment ends. If the employer chooses to be difficult, however, things become more complicated.

The law itself is unclear about how this situation should be handled. Bonus-related disputes which have gone to court, however, have established some precedents. How bonuses have been handled when employees have been made redundant previously within the same company has been judged to be significant; in addition, how such matters have been handled by comparable companies within the same industry has also been judged to be significant. If you find yourself in this situation, therefore, there may be some scope for you to take legal action against your employer, or to push for a settlement with either an implicit or explicit threat of legal action if no reasonable accommodation is made.

When the payment is made on a discretionary basis, the employer’s discretion has been found to be not unlimited. If, for example, your performance during the year can be shown to have been outstanding, and your employer arbitrarily refuses to make a bonus payment to you, a court may find that the employer has acted unreasonably.

Non-Cash Bonuses on Redundancy

If your employer normally finances part of your bonus to be received as tangible benefits rather than cash, for tax purposes the benefits are converted into a cash amount and thus will count towards your £30,000 tax-free upper limit.

Bonuses and Redundancy – Conclusion

Bonuses are one of the greyer areas of redundancy handling. Although the subject is perhaps inadequately addressed by existing legislation, custom and precedent have established some general principles which can provide a sufficient basis for taking action against an unreasonable employer in some cases.