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As we come to the end of the year, some employers may pay a bonus in recognition of past performance or a financial incentive to perform in the coming year.  Incentive bonus payment schemes are valuable tools for employers both to drive and reward performance, but advice on working out the structure of the scheme to calculate what the actual cost is likely to be is key to avoid surprises in terms of whether the payment has to be accounted for in calculating holiday pay.  The Holidays Act 2003 governs entitlement to payment for holidays, providing that holiday pay is calculated on the basis of an employee’s gross earnings, which includes incentive payments except where these are discretionary.

However, what is truly discretionary is not always clear and will depend on how the bonus or incentive terms are drafted.  Being clear about the discretion in the employment agreement is key to avoiding surprises.  For example, if an employment agreement says that where an employee performs to a certain standard they will be paid a bonus, yet there is discretion as to what amount, this is likely to attract holiday pay as it will be defined as gross earnings. However, if making a bonus payment at all is discretionary, that is likely to be excluded from the definition.

If an employer does not pay the employee their correct holiday pay entitlement, there is a six year limitation period for back pay, as well as potential penalties.

Our specialist team can provide advice on how to structure bonus or incentive schemes in the most cost effective way, as well as on the application of the law to schemes already in place.

Disclaimer: We remind you that while this article provides commentary on employment law and health and safety topics, it should not be used as a substitute for legal or professional advice for specific situations. Please seek legal advice from your lawyer for any questions specific to your workplace.