Things for employers to consider when making one-off payments

In the current economic climate, both employers and employees are watching their pennies carefully. Recently, the current Government indicated it was considering a one-off hardship payment to healthcare workers to help them get through the winter. This may cause other employers to consider whether they should do something similar. This article looks at when one-off payments should be used, and some of the risks employers need to consider.   

When are one-off payments used?

There are many circumstances in which employers may wish to make a one-off payment. A “golden hello” or signing bonus is a one-off payment paid to a new employee as an enticement for them to join your business. If you are struggling to recruit employees, a golden hello is one strategy to attract top talent.

If your business has had a particularly profitable year, you may want to issue a one-off bonus to your employees. This may make them feel that they are sharing in the business’s success and can help foster staff loyalty.  

Currently, many employers are looking for ways to help their employees get through the current cost of living crisis but are not in a position to offer wage increases. If you are unable to commit to increasing employees’ salaries, a one-off “hardship” payment may be a suitable alternative.  

Drawbacks

One risk of providing periodic bonuses is that over time, a contractual right to receive a bonus may be implied by custom and practice. When a bonus is a contractual right, it is much harder for employers to amend or withdraw the bonus scheme. The risk of a bonus becoming a contractual right is greater where the bonus has been paid regularly over a number of years, and where it has been for the same amount or calculated the same way each time. Referring to the bonus scheme as “discretionary” is therefore not determinative, and a tribunal will consider all the circumstances when deciding whether a contractual right to a bonus has arisen.  

Employers should also be mindful that one-off payments are not a long term solution. While most employees would no doubt appreciate a one-off payment, they may become demoralized if these payments are used instead of a pay raise, especially when the cost of living keeps increasing. For low-wage employees there is also a risk that a one-off payment will interfere with their eligibility for other government benefits. For these employees you could consider spreading the one-off payment over several installments as a temporary pay raise.

Protecting the business when making one-off payments

If you decide that you do want to make a one-off payment to your employees there are some further points to consider and steps you should take to protect your business.

If you have provided a signing bonus to entice someone to your business, make sure that this payment is subject to a clawback provision, so that you can reclaim all or part of the payment if the employee leaves your business before a certain period. 

For existing employees, you should be absolutely clear that you are making a one-off payment and not a permanent pay raise. You may want to include in your employment contracts that any bonus paid is purely discretionary and subject to criteria as decided by you from time to time. However, as mentioned above this will not guarantee that bonuses will never become a contractual benefit so you may also want to specify circumstances in which a bonus will not normally be paid, such as where the employee has been found guilty of misconduct or where the employee is under notice of termination.

There are also limits in how you may exercise your discretion in distributing bonuses. You must exercise your discretion:

• Honestly and in good faith;
• In a way that is not arbitrary, capricious, or irrational; and
• In a way that will not breach the implied term of trust and confidence. 

You should therefore record the reason for giving (or not giving) a bonus to each employee and make sure that any criteria for receiving a bonus is not discriminatory.

If you would like advice on making one-off payments to employees, or would like help drafting a bonus clause in your contracts of employment, contact our Employment Team for assistance. You can email us at employment@warnergoodman.co.uk or call us on 023 8071 7717.