In this article we consider employee benefits and the issues employers need to be aware of when drafting benefit clauses in employment contracts. We focus on the most common benefits, specifically bonuses, permanent health insurance and company cars.
Incentive based remuneration and other benefits allow employers to attract and retain employees. They can also act as a tool to increase motivation and create a sense of loyalty.
Unlike several of the topics we have covered so far in this series, there is no requirement under section 1 of the Employment Rights Act 1996 to include, in the statement of initial employment particulars, any terms and conditions relating to benefits. In practice however provisions relating to bonuses and benefits are often included. The drafting of such clauses is complex and care must be taken by employers when setting out these entitlements in an employee's contract of employment.
If an employer wishes to offer an employee the opportunity to earn a bonus, this ideally should be expressed in the contract of employment.
An employer may intend for an employee's bonus entitlement to be contractual ie there will be a binding contractual obligation upon the employer to pay the requisite sum. The value of a contractual bonus may be calculated according to a specific formula set out in the contract or on the fulfillment of certain conditions. In such cases the bonus clause in the employment contract should expressly state:
- the set formula used to calculate the bonus or the conditions that must be fulfilled by the employee for the bonus to be obtained;
- the payment terms of the bonus payment; and
- what will happen if the employee is dismissed, leaves, or serves notice to leave part way through a bonus year or after the calculation of the bonus but prior to payment.
More commonly however employers will wish to retain maximum discretion in respect to an employee's entitlement to any bonus. If a bonus entitlement is intended to be discretionary the bonus clause should clearly state:
- that any bonus entitlement is entirely at the discretion of the employer;
- the factors that may be taken into account by the employer in exercising discretion;
- that the employer may award a nil bonus year and that bonus entitlement in one year does not give an automatic entitlement in future years; and
- that the bonus scheme may be amended or withdrawn without compensation at any time.
There is a risk that bonuses that begin on a discretionary basis may become a contractual entitlement over time, if, for example, an employer makes regular bonus payments of a set amount, or a sum calculated on the same basis, over a number of years. The label applied to a bonus will not, unhelpfully, always be conclusive - in the event of a dispute, a Court will look at all of the circumstances (not just any agreement in place) to understand the true nature of the bonus. To mitigate this risk employers should regularly review existing bonus scheme wording (and corresponding bonus payments) which may be regarded as 'discretionary' to see if it could arguably be (or have become) a contractual entitlement.
Permanent health insurance
It is increasingly common for employers to provide employees with permanent health insurance (PHI) during periods of long-term sickness or incapacity. This benefit is usually provided by the employer taking out a PHI policy with a third party insurer. When setting out any PHI entitlement in an employment contract employers should:
- incorporate the rules of the PHI policy into the employment contract. If the employment contract does not do so (for example, by reference), there is a risk the employer will be highly exposed if a contractual term provides for a greater benefit than the PHI policy. This is because, if the
- insurance provider rejects the claim, the employer may be liable to pay the full amount;
- make it clear that the employer has the right to discontinue, vary or amend the scheme (including the level of the employee's cover) at any time; and
- set out that the employer will not be liable to compensate the employee or provide any replacement benefit if the insurance provider refuses to provide PHI cover to the employee.
It is worth noting that, where the PHI policy provides that benefits will only be paid in respect of employees who continue to be employed, a Court may imply a term into the employment contract to the effect that an employer will not terminate an employee's employment while he is incapacitated from work.
To mitigate the risk of this occurring, employers may wish to insert an express contractual provision into the employment contract which reserves the employer's right to terminate for incapacity, notwithstanding the existence of PHI. However, if an employee is dismissed in circumstances which give rise to a breach of contract claim for being wrongfully deprived of PHI benefits, they may be entitled to damages for breach of contract which would be assessed by reference to the total benefit lost under the PHI policy (which may be significant).
Company cars have traditionally been and continue to be an effective way of remunerating employees. When drafting a company car clause within an employment contract it is advisable for employers to make it clear:
- that the supply of the company car to the employee is provisional on the employee holding a current and full driving licence;
- whether the employee is permitted private use of the car only or whether the employee's family can also use the car; and
- who will bear the reasonable running costs of the car (ie insurance, maintenance, repair and fuel costs).
From an employer perspective it is not advisable to set out in the employment contract the exact specifications of the car to be provided to the employee. This permits greater flexibility to the employer.
It is however sensible for an employer to have rules governing the employee's use of the company car. While these rules can to some extent be included in the employment contract, it is preferable to have a more detailed policy which would set out the employee's responsibilities for the car.
This should include procedures for the use of the car, responsibilities for expenses, payment of fines/traffic offences, notification of accidents involving the car and arrangements on termination of the employee's employment.
Top tips for employers
Naturally, as set out above, the drafting of any benefit clause must be tailored to the specific benefit in question, however the overriding points for an employer to consider are:
- if a benefit is intended to be discretionary (rather than a contractual) entitlement, make it expressly clear that this is the case; and
- always make it clear that the employer has the right to revoke, discontinue, vary or amend the benefit scheme at any time (if appropriate).
In our sixth article in this series we focus on pension clauses in employment contracts.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.