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Bonuses and Unlawful Deductions from Wages

Disputes about bonuses are not uncommon, and a senior executive who doesn’t receive the payment they think they’re entitled to might have a good claim for breach of contract. But such claims can be complex and expensive, and the risk of an adverse costs award if a claim fails in the High Court or County Court can be a major deterrent.

Although breach of contract claims can be brought in the Employment Tribunal, where the process is generally simpler and costs awards are rarely made, this is only possible when the employment has ended, and damages are limited to £25,000.There is, however, another route that might be an option, as all workers are protected by the Employment Rights Act 1996 (ERA) from unauthorised deductions from their wages (commonly called “unlawful deductions from wages”.

A failure to pay the whole or any part of the wages when they are due will amount to a deduction.

The general principle of sections 13 to 27 ERA is that employers may not make deductions from their workers’ wages unless:

  • The deduction is required or authorised to be made by virtue of a statutory provision relevant to the worker’s contract; or
  • The worker has previously signified in writing their agreement or consent to the making of the deduction.

If the employer breaches this the worker can pursue a claim in the Employment Tribunal. But would an unlawful deduction from wages claim extend to the withholding of bonus payments?

Is a bonus ”wages”?

The ERA defines wages as “any sum payable to the worker in connection with his employment” with a helpful list of the types of sums included. At the top of the list is “any fee, bonus, commission, holiday pay or other emolument referable to his employment, whether payable under his contract or otherwise.” It therefore incorporates contractual and non-contractual bonuses in the definition of wages.

To pursue a claim under the ERA, the worker has to be able to claim a quantified amount.  Where the bonus is a guaranteed figure (as might be the case for a senior employee in the first year of employment), or an amount which can be calculated precisely using a set formula (such as one based on the worker’s and/or the employer’s financial performance), this should be straightforward. 

For discretionary bonus awards, the situation is more complicated, because the worker will not be able to claim that they are entitled to a quantified amount until the employer has exercised its discretion and determined the bonus that the worker is to receive.  However, once the employer has done so, the worker will be able to pursue a claim for an unlawful deduction if the whole or any part of the bonus isn’t paid.

For example, in Farrell Matthews and Weir v Hansen (2004, EAT), the employee was awarded a non-contractual discretionary bonus for her work during the previous year which was made payable over a period of 12 months, provided the employee did not give notice to terminate her employment during this period. The employer subsequently added a further condition, such that the remaining instalments of the bonus would not be paid if notice of termination was given by the employer, including on grounds of redundancy. This meant that the employee could be deprived of a bonus, to which she had acquired a legal entitlement, through no fault of her own. Partly as a result of this, the employee resigned in circumstances which amounted to a constructive dismissal. She claimed that the employer’s failure to pay her the remaining instalments of the bonus was an unlawful deduction of wages, and the Employment Tribunal (and Employment Appeal Tribunal) agreed. Once the bonus had been declared, the employer had a legal obligation to pay it by the monthly instalments, subject to the condition that the employee did not herself terminate her employment, which condition could not include the employee giving notice in circumstances where she was constructively dismissed.
Points to consider for pursuing a claim

If you are thinking of claiming unlawful deductions from wages in the Employment Tribunal for the failure to pay a bonus, here are some additional key points to bear in mind:

  • There is no required length of service for an unlawful deductions from wages claim.
  • A worker typically has three months less one day from the date of the deduction (or most recent deduction, if it is part of a series) to make a claim.
  • There is no limit to the amount that can be awarded if the claim is successful, so a worker can recover all of the sum that they should have received.

If you would like to discuss a potential claim for unlawful deductions or if you have any questions arising from this article, please contact Partner David Fisher, or Trainee Solicitor Mitchell Blythe, both of whom specialise in employment law issues for senior executives.