Staff Pay Issues

Helen O'Brien writes:

Nothing causes more consternation among staff than a dispute over pay entitlements. Carol Smith, Senior Employment Consultant at Croner highlights some of the issues involved.


1. Entitlement

Financial remuneration can take a variety of forms and in the case of bonus payments create public hostility where they are received by those whose own performance is called into question. The amount of remuneration and the method of calculation is a fundamental dimension of the agreement between the parties and must be reflected in the statutory particulars of contract provided to the employee. However, it is possible to refer to incorporated collective agreements which are relevant, such as profit sharing schemes and bonus-earning arrangements. Entitlement to a bonus may be a contractual right or be discretionary at the hands of others within the organisation. In many cases bonuses are dangled as a powerful incentivisation tool for certain staff.

Although the expression “discretionary” would suggest that the employer is reserving total flexibility as to whether to pay such a bonus, the courts have established that in making their decision as to whether to pay it, or how much, their discretion must not be exercised in an irrational or perverse manner. In Humphreys v Norilsk International (UK) Ltd [2010] IRLR 976 the High Court held that this was a higher test than mere unreasonableness by the employer, and on that basis the employee’s claim to receive his performance-related bonus failed.

The courts also moderate contractual terms governing bonus payments by interpreting ambiguities from the standpoint of a reasonable person with all the background information that would have been available to the parties at the time the contract was made. In Chartbrook v Persimmon Homes [2009] UKHL 38 it was stated that when construing the meaning of words in a contract, the context and background were relevant, but not pre-contractual negotiations between the parties.


2. Pay cuts

In Garside & Laycock v Booth [2011] UKEAT/0003/11 the employee was dismissed after he refused to accept a 5% staff pay cut introduced by his employer, who was experiencing trading difficulties. This initiative was put forward as a cost-cutting measure rather than making redundancies. It was accepted by all 77 of the claimant’s colleagues following a vote. The employer issued revised contracts on reduced pay, but the claimant was ultimately dismissed when he continued to refuse the new contract despite a series of meetings and an internal appeal. This was held to be a fair dismissal because the test was whether the employer had acted reasonably in all the circumstances in deciding to dismiss, rather than whether the employee’s refusal to accept the lesser terms offered to him was reasonable.


3. Unlawful deductions

The employer is under a duty to pay to their employees such sums as are “properly payable”. There has to be a sum to which an employee has some legal but not necessarily contractual entitlement from which the deduction could be made. Such entitlement must be resolved as a preliminary issue before the tribunal can determine whether there has been an unlawful deduction from wages. In Hellewell v AXA Securities [2011] UKEAT 0084/11 the claimant was dismissed for gross misconduct and his employer withheld from him a bonus which was paid to other staff in respect of the previous and current year’s work. The bonus scheme specifically relieved the employer from any obligation to pay the bonus in cases where the employee was dismissed for gross misconduct. As there was no legal entitlement to receive it in the first place, its non-payment could not be challenged by way of a claim for unlawful deduction from wages.


4. Conclusion

The proper payment of a wage, salary or bonus due under an employment contract is a fundamental part of the original wage-work bargain and failures by employers to pay the full amount owed have led to many acrimonious cases. With any type of litigation, this can seriously damage the working relationship between the parties and may also destroy the employee’s confidence that they will receive their remuneration in future.