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Are attendance bonuses legal?

Incentives to motivate and encourage staff to perform can take many forms, including the payment of bonuses. Attendance bonuses are sometimes used by employers to improve attendance rates, with employees receiving a bonus if they have no (or few) sick days during the relevant period (for example, in a given week).

One problem with such bonus schemes, however, is that they may be indirectly discriminatory in nature if they do not take into account the reason for an employee's absence. For instance, those who are absent as a result of pregnancy-related illness, or as a result of a disability under the Equality Act 2010, have the right not to be discriminated against by reason of those conditions.

This was illustrated in the Employment Appeal Tribunal (EAT) case of Land Registry v Houghton, in which the Land Registry's corporate bonus scheme disqualified employees from any entitlement to a bonus where they had a formal warning on file for sickness absence. The claimant in this case had a known disability and, although the employer had made some reasonable adjustments in its absence processes, the employee nonetheless received a warning for absence relating to his disability and was rendered ineligible to receive a bonus. The decision not to award one was found to constitute unfavourable treatment arising from disability. Although the bonus in this case was described as a corporate bonus that rewarded both attendance and performance, the same risks apply to attendance bonuses.

Any bonus scheme would therefore need to have a system of checks in place to ensure that any sick days taken as a result of pregnancy-related illness or disability were not taken into account when determining entitlement to the bonus.

Additionally, employers should be alive to the effect of attendance bonuses in respect of national minimum wage (NMW) obligations. In Aviation & Airport Services Ltd v Bellfield, the employer ran a weekly attendance bonus scheme (referred to as an attendance allowance), which was payable if the employee worked an entire week without absence or lateness. On the facts of the case, the EAT found that this bonus should not to be taken into account when determining whether NMW obligations were being met.

Another issue to take into account is holiday pay. In May Gurney Ltd v Adshead, the EAT considered a number of holiday pay and bonus issues, including whether an attendance allowance should be included in holiday pay calculations. The EAT decided that it should, and further cases, such as Wood and others v Hertel (UK) Ltd, involving bonuses akin to attendance allowances have come to similar conclusions.

Employers are divided about the merits and effectiveness of attendance bonus schemes. However, for employers who choose to use them, they should be aware of the following:

  • If an absence(s) disqualifies an employee from entitlement to a bonus payment, the reason for the absence(s) should be considered and, if the reason relates to pregnancy, disability or other protected characteristics, the absence(s) should be ignored for the purposes of assessing bonus entitlement.
  • Ensure that employees are being paid the relevant NMW, without counting the attendance bonus.
  • In calculating holiday pay payments, attendance bonuses should be factored in.
  • Under the recently introduced gender pay gap reporting requirements, employers with 250 or more employees have to collate specific information about the mean and median bonus gender pay gap, and the proportion of males and females receiving a bonus payment.

Kevin Lau is a senior employment solicitor at Blake Morgan

Added: 27-07-2017
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