UK: The Impact of Maternity Leave on an Employer’s Obligation to Pay Bonuses

Last Updated: 2 September 2005

Introduction

The impact of maternity leave on an employer’s obligation to pay bonuses has been a grey area for several years. In particular, it has been unclear whether an employer can pro-rate a bonus so that it is payable only in respect of the period when an employee is at work prior to taking maternity leave or whether bonuses must be paid in full in any event. There have been relatively few cases in this area and those judgments which do exist are fact-specific and provide little in the way of generic guidance on the correct approach for employers to take.

In the recent case of Hoyland v Asda Stores Limited (2005) ("Hoyland"), the EAT has addressed some of the common issues faced by employers, and the judgment is particularly helpful in respect of non-discretionary bonus schemes.

The Judgment In Hoyland

Mrs Hoyland was employed by Asda. Asda put in place a bonus scheme the purpose of which was to reward employees for their work and continued contribution to the financial performance of the business during the calendar year. Under the terms of the scheme, bonus payments were pro-rated where employees were absent for eight consecutive weeks or more during the year. Maternity leave was treated as absence for these purposes. Mrs Hoyland was absent for 183 days on maternity leave during 2002 and her bonus was pro-rated accordingly. Mrs Hoyland brought a claim challenging the basis of the reduced bonus on the grounds of sex discrimination and pregnancy-related detriment.

Claims under the Sex Discrimination Act 1975 ("the Act") or the Maternity and Parental Leave Regulations 1999 ("the Regulations") cannot be brought in relation to "benefits consisting of the payment of money when the provision of those benefits is regulated by the woman’s contract of employment" or to "wages or salary" respectively. In Hoyland, the EAT confirmed that bonuses which, although stated to be discretionary, are in reality not truly discretionary (for example, if everyone in active employment receives the bonus at a set amount for hitting particular targets as in this case) will be treated as governed by the contract of employment and akin to wages or salary, and claims in relation to such bonuses are excluded under the above legislation.

When Will A Bonus Be Considered As Arising From The Contract Of Employment Or As "Wages Or Salary"?

In Hoyland, the reason Asda were allowed to pro-rate the bonus was because, although described as "discretionary", the bonus did not appear to have been withheld from anyone who satisfied the qualifying requirements. There was no discretion as to payment if the rules of the scheme were complied with and there was no discretion in respect of the amount of the bonus paid. In those circumstances, the bonus could be treated as a contractual payment.

As regards whether the payment should be properly treated as "wages or salary", the Tribunal was influenced by the fact that the bonus was paid through Asda’s payroll, was subject to deductions for tax and national insurance contributions, and a percentage was paid into employees’ pension plans with an equivalent amount being contributed by Asda.

In such circumstances and where the bonus was designed to reward attendance at work which contributed to the overall performance of the business during a bonus year, the bonus could be treated as wages or salary.

One important point to note, and which employers often miss, is the period for which a pro-rated bonus must be paid. In Hoyland, the EAT have made clear that where a prorated bonus is payable to an employee on maternity leave, she must be paid for the period when she was present at work and the two week period of compulsory maternity leave.

In What Circumstances May An Employer Pro-Rate A Bonus?

Hoyland has (for now at least) clarified the position solely in relation to contractual bonus schemes. The situation with regard to discretionary bonuses remains a grey area because, arguably, such bonuses cannot be considered as arising from the contract of employment or as "wages or salary".

Arguably a discretionary bonus, the payment and amount of which is not guaranteed, is not governed by the employee’s contract of employment and would not fall within the definition of "remuneration". Therefore successful discrimination claims may still be brought if a discretionary bonus is not paid to an employee on maternity leave. Although there are arguments that a discretionary bonus may be pro-rated for the period when the employee was actually at work, the cautious approach would still be to pay a discretionary bonus in full for the period of OML. With additional maternity leave ("AML"), because "remuneration" is not defined, arguably a discretionary bonus would fall to be treated as remuneration. The result of this would be that an employer’s failure to pay a discretionary bonus for that period would not be discriminatory.

Conclusion

The judgment in Hoyland emphasises that, where employers are prepared to establish contractual bonus schemes – i.e. schemes with clear criteria based on active performance – the approach to payment of bonuses to employees on maternity leave is much more straightforward. Where a bonus is payable based on past performance during the bonus period, an employer may pro-rate the bonus to take into account only the period when the employee was actively at work and the period of compulsory maternity leave. If the bonus is a one-off bonus paid to those who are at work on a particular date, employees on maternity leave may not be entitled to the bonus at all. However, for City employers who tend to want to maintain as much discretion as possible in their bonus schemes, uncertainty remains.

The judgment in Hoyland, like the judgment in Barton v Investec Henderson Crosthwaite Securities Limited (2003), is yet another encouragement to employers to move away from opaque bonus schemes. The more transparent the scheme, the smaller the risk of receiving discrimination and equal pay claims, whether based on maternity or not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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