What Are the Different Types of Bonuses?

Bonuses are payments made in addition to an employee's normal salary or wages. They may reward individual performance, team results, company performance or the achievement of particular objectives.

A bonus arrangement will usually fall into one of three broad categories:

• Discretionary bonuses
• Contractual bonuses
• Schemes containing both contractual and discretionary elements

The wording of your employment contract and the rules of the bonus scheme are particularly important when deciding whether you are legally entitled to receive a payment.

What is a Discretionary Bonus?

Many employers describe their bonus schemes as discretionary.

This usually means that the employer retains some flexibility over whether a bonus will be awarded, how much will be paid or how performance will be assessed.

A discretionary scheme might take account of factors such as:

• Individual performance
• Team performance
• Company results
• Achievement of agreed targets
• Conduct and disciplinary history
• Wider business circumstances

However, describing a bonus as discretionary does not give an employer unlimited freedom to make whatever decision it wishes.

An employer should exercise its discretion fairly, honestly and reasonably. A decision should not normally be arbitrary, irrational, discriminatory or based on irrelevant considerations.

For example, an employer could potentially face a challenge if an employee has performed strongly against the stated criteria but receives no bonus simply because a manager personally dislikes them.

Problems can also arise where an employer relies on criteria that were never communicated to employees or applies the scheme inconsistently between comparable members of staff.

If you are unhappy with a discretionary bonus decision, it will usually be sensible to ask your employer how the decision was reached.

If the issue cannot be resolved informally, you may consider raising a formal grievance or obtaining legal advice.

What is a Contractual Bonus?

A contractual bonus is one that forms part of your contractual entitlement.

The employment contract or bonus scheme should normally explain:

• When the bonus becomes payable
• How the bonus will be calculated
• What performance conditions apply
• Whether company results are relevant
• Whether you must remain employed on the payment date
• Whether employees serving notice remain eligible
• What happens if employment ends during the bonus year

Where the contractual conditions have been satisfied, the employer will generally be required to honour the bonus arrangement.

A failure to pay a contractual bonus may potentially amount to:

• Breach of contract
• An unlawful deduction from wages
• In serious circumstances, a breach capable of contributing to a constructive dismissal claim

Whether any particular claim is available will depend on the wording of the contract and the surrounding circumstances.

Can a Bonus Scheme Be Part Contractual and Part Discretionary?

Yes.

Some schemes give an employee a contractual right to participate in the bonus scheme while leaving the amount of the eventual award to the employer's discretion.

For example, you might have a contractual entitlement to be considered for an annual bonus, while the employer retains discretion over the amount based on your performance and the organisation's financial results.

Even where the amount remains discretionary, the employer should still exercise that discretion fairly and reasonably.

The precise wording of the bonus documentation will therefore be important.

Can a Bonus Become Contractual Through Custom and Practice?

In some circumstances, a bonus that is not expressly written into the employment contract may become an implied contractual entitlement through custom and practice.

This may arise where an employer has consistently paid a particular bonus over a significant period and the arrangement has become sufficiently certain and established.

Relevant factors can include:

• How regularly the bonus has been paid
• How long the practice has continued
• Whether employees reasonably expect the payment
• Whether the amount or method of calculation is consistent
• Whether the employer has described the payment as discretionary
• What the written contract says about bonuses

However, custom and practice will be much more difficult to establish where the written contract clearly states that bonuses are discretionary and do not form part of the employee's contractual entitlement.

What Are Restricted Stock Units and Deferred Compensation?

Some employers provide part of an employee's remuneration through long-term incentive arrangements rather than paying the entire award in cash.

These arrangements are particularly common in financial services and senior executive remuneration.

A Long-Term Incentive Plan, often known as an LTIP, may involve shares, restricted stock units or other forms of deferred compensation.

A Restricted Stock Unit, or RSU, normally represents a promise to provide shares or their cash equivalent once specified conditions have been satisfied.

Those conditions may include:

• Remaining employed for a particular period
• Meeting individual performance targets
• Meeting company performance targets
• Compliance with conduct requirements
• Reaching specified vesting dates

An RSU award will commonly be subject to a vesting schedule.

For example, an award might vest in separate portions over several years rather than becoming available immediately.

Once an award has vested, the employee may receive shares or, depending on the scheme, a cash equivalent.

Can Deferred Bonuses or Shares Be Forfeited?

Potentially, yes.

Share plans, deferred bonuses and long-term incentive arrangements often contain provisions dealing with what happens if the employee leaves the organisation or is found to have engaged in misconduct.

The rules may contain concepts such as:

• Good leaver status
• Bad leaver status
• Forfeiture
• Malus
• Clawback
• Vesting conditions
• Post-termination restrictions

For example, unvested awards might be lost where an employee is dismissed for gross misconduct.

Some regulated financial services arrangements may also permit awards to be reduced or recovered where misconduct, risk failures or serious performance issues subsequently come to light.

The outcome will depend on the precise terms of the relevant award and scheme.

What Happens to Your Bonus When Employment Ends?

Bonus disputes frequently arise when an employee resigns, is dismissed or is made redundant before a bonus is paid.

Whether you remain entitled to a bonus will usually depend on:

• The wording of your employment contract
• The terms of the bonus scheme
• Whether the bonus is contractual or discretionary
• The period to which the bonus relates
• Whether you remain employed on the payment date
• Whether you are serving notice
• Why your employment is ending
• Whether any good leaver or bad leaver provisions apply

It is therefore important to review the relevant documentation carefully before assuming that a bonus will or will not be payable.

What Happens to a Bonus Following Gross Misconduct?

Bonus schemes commonly provide that an employee dismissed for gross misconduct will lose some or all outstanding bonus entitlement.

This may include:

• An unpaid annual bonus
• Deferred cash awards
• Unvested shares
• Restricted stock units
• Long-term incentive awards

However, forfeiture is not automatic in every case. The employer will normally need to rely on the relevant contractual or scheme provisions.

If an employee successfully challenges the dismissal and establishes that financial loss resulted from the employer's unlawful conduct, lost bonus payments could potentially form part of the compensation being claimed.

The position will depend upon the scheme rules, the nature of the dismissal and whether the employee can establish that the bonus would otherwise have been received.

Do You Have to Be Employed on the Bonus Payment Date?

Many bonus schemes contain specific eligibility clauses.

Common conditions include requirements that:

• You must still be employed when the bonus is paid
• You must not have given notice
• You must not have received notice of termination
• You must not be subject to disciplinary proceedings
• You must meet specified performance requirements

These provisions can have significant consequences.

For example, an employee may have worked for almost the entire bonus year but still lose entitlement because they resigned before the payment date and the scheme expressly requires employees not to be serving notice.

The starting point will therefore always be the wording of the relevant bonus scheme.

What Happens to a Bonus if You Are Made Redundant?

There is no single rule applying to every redundancy situation.

Your employment contract and bonus scheme should explain what happens where employment ends because of redundancy.

Depending on the terms, an employer may:

• Pay the bonus in full
• Pay a proportionate bonus reflecting the part of the year worked
• Treat redundancy as a good leaver event
• Require employment to continue until the normal payment date
• Exclude employees who are serving notice

If you are made redundant close to the bonus payment date, it is particularly important to check your contractual position.

An employer should also apply its bonus rules consistently and should not manipulate the termination process irrationally simply to deprive an employee of an entitlement that would otherwise have arisen.

How Does Working Your Notice Affect a Bonus?

Where your employer terminates your employment with notice, there are generally several ways the notice period might be dealt with.

You may:

1. Continue working during your notice period
2. Be placed on garden leave
3. Receive a payment in lieu of notice

Each arrangement can affect bonus entitlement differently.

Working During Your Notice Period

If you continue working, you remain employed until the termination date.

However, this does not necessarily guarantee a bonus because the scheme may exclude employees who are under notice even if they remain employed on the payment date.

Garden Leave

An employee on garden leave normally remains employed throughout the notice period.

Your contractual salary and applicable benefits will generally continue, but your bonus entitlement will still depend upon the wording of the scheme.

A clause excluding anyone who is under notice could apply even though you technically remain employed.

Payment in Lieu of Notice

A Payment in Lieu of Notice, commonly known as PILON, allows employment to end immediately with the employee receiving a payment instead of working some or all of the notice period.

Where employment ends before the bonus payment date, an employee may lose eligibility if the bonus scheme requires them to remain employed at that date.

The position can become more complicated where the employer has no contractual right to terminate employment using PILON or where the termination has been structured specifically to prevent an otherwise earned bonus from becoming payable.

Legal advice may be appropriate where a significant bonus is at stake.

What Happens if There is No Contractual PILON Clause?

If the employer terminates the employment immediately without having a contractual right to do so, this may amount to a breach of contract or wrongful dismissal.

Depending on the circumstances, damages may potentially include contractual sums that the employee would have received had the proper notice period been observed.

This could potentially include a bonus where the employee can establish that it would have become payable during the contractual notice period.

However, the result will depend on matters such as:

• The terms of the bonus scheme
• Whether entitlement was sufficiently certain
• The contractual notice period
• The date the bonus would have been paid
• Any clauses excluding employees serving notice

These cases can be highly fact-specific.

Can an Employer Deduct or Recover a Bonus That Has Already Been Paid?

Once a bonus has become contractually due or has been paid as part of an employee's remuneration, it may fall within the statutory definition of wages.

An employer cannot normally make deductions from wages unless there is a lawful basis for doing so.

This could include:

• A statutory requirement
• A contractual right to make the deduction
• The employee's prior written agreement
• A valid clawback provision

For regulated employees or employees participating in deferred compensation schemes, separate malus or clawback provisions may also apply.

If an employer deducts money without lawful authority, an employee may potentially have a claim for unlawful deduction from wages.

Can an Employer's Promise of a Bonus Become Binding?

Potentially.

A bonus does not necessarily need to originate from a lengthy written scheme before it can have legal effect.

A sufficiently clear promise may potentially become contractually binding depending on:

• What was said or written
• How definite the promise was
• Who made the promise
• Whether that person had authority
• Whether conditions were attached
• Whether employees relied upon the promise
• The surrounding contractual arrangements

General statements about hoped-for or possible bonuses will not necessarily create an enforceable entitlement.

However, a clear commitment to make a defined payment can have different legal consequences.

For this reason, emails, letters, presentations and other communications about bonus awards can sometimes become important evidence in a dispute.

What Are the Current Rules on Bankers' Bonuses?

The UK previously operated a regulatory cap limiting the ratio between certain bankers' fixed and variable remuneration.

That bonus cap has now been removed.

The Financial Conduct Authority and Prudential Regulation Authority removed the cap with effect from 31 October 2023.

This means there is no longer a general UK regulatory rule limiting relevant bonuses to 100% of fixed salary, or 200% with shareholder approval.

However, this does not mean that regulated financial institutions have complete freedom over remuneration.

Banks and other firms falling within the relevant regulatory regimes continue to be subject to remuneration rules designed to align reward with prudent risk-taking and long-term performance.

Depending upon the firm and the employee's regulatory classification, these rules may address matters such as:

• Deferral of variable remuneration
• Payment through financial instruments
• Risk adjustment
• Malus
• Clawback
• Governance and remuneration policies
• Identification of material risk takers

The FCA and PRA introduced further reforms to the remuneration regime in 2025, with relevant changes applying to performance years beginning after the reforms came into force.

Employees in regulated financial services should therefore check both their contractual scheme and the regulatory rules applicable to their particular employer and role.

Why Are Good Leaver and Bad Leaver Provisions Important?

Employees with share awards, deferred bonuses or long-term incentive plans should pay particular attention to good leaver and bad leaver provisions.

Good leaver treatment may apply in circumstances such as:

• Redundancy
• Ill health
• Disability
• Retirement
• Death
• Other circumstances approved by the remuneration committee

Bad leaver treatment may apply where employment ends because of matters such as serious misconduct.

The distinction can determine whether outstanding awards:

• Continue to vest
• Vest early
• Vest on a reduced basis
• Remain deferred
• Are cancelled entirely

The exact definitions vary significantly between schemes.

Where employment is being terminated under a settlement agreement, the treatment of bonuses, deferred awards and leaver status should therefore be addressed expressly.

What Happens to Bonuses During Maternity Leave?

Bonus entitlement during maternity leave can depend on the nature of the bonus.

Different rules can apply depending on whether the bonus rewards:

• The performance of the organisation
• The employee's individual performance

Bonuses Based on Company Performance

Where a bonus is based solely on the performance of the organisation rather than work performed personally by the employee, an employee on maternity leave should generally remain eligible provided the other conditions of the scheme are satisfied.

An employer should not simply exclude an employee because they are on maternity leave or reduce the payment solely for that reason.

Doing so could potentially amount to maternity discrimination and, where the payment is contractual, breach of contract.

Bonuses Based on Individual Performance

Where a bonus rewards an employee's individual performance, an employer can generally calculate the payment on a proportionate basis to reflect the part of the bonus year in which the employee was working.

The calculation should normally take account of periods during which the employee:

• Worked before maternity leave began
• Was on compulsory maternity leave
• Worked during any Keeping in Touch days
• Worked after returning from maternity leave

The employee will still need to satisfy any legitimate performance conditions attached to the scheme.

Maternity and bonus rights can be complex, particularly where a scheme contains both individual and company-performance elements.

What if the Bonus Scheme is Discretionary During Maternity Leave?

An employer must still exercise a discretionary bonus scheme fairly and lawfully.

Pregnancy or maternity leave should not be used as a reason to deny an employee a bonus where doing so would amount to unlawful discrimination.

The employer should apply the relevant criteria consistently and consider the employee's contribution during the periods for which they are entitled to be assessed.

What if There is No Written Bonus Clause?

The absence of a written bonus clause does not automatically mean that an employee has no rights.

It may be necessary to consider:

• Whether bonuses have regularly been paid in previous years
• Whether the practice has become contractual through custom and practice
• What representations have been made to employees
• Whether the employer has consistently treated the bonus as discretionary
• Whether excluding a particular employee would be discriminatory

The circumstances of each case will determine whether an enforceable entitlement exists.

What Should You Do if Your Bonus Has Not Been Paid?

If you believe you have been wrongly denied a bonus, it will usually be sensible to raise the matter with your employer first.

You may wish to ask for:

• A copy of the applicable bonus scheme
• An explanation of how your award was calculated
• Confirmation of the performance criteria applied
• Details of any provision relied upon to withhold the bonus
• An explanation of any differences in treatment

If the matter cannot be resolved informally, you may consider raising a formal grievance.

Keep copies of relevant documents, including:

• Your employment contract
• Bonus scheme rules
• Performance reviews
• Target documentation
• Payslips
• Emails concerning the bonus
• Previous bonus awards
• Termination documentation

These documents may be important if legal proceedings become necessary.

Can You Bring an Unlawful Deduction From Wages Claim?

Where a contractual bonus has become due but has not been paid, an employee may potentially bring a claim for unlawful deduction from wages in the Employment Tribunal.

This route is particularly relevant where the amount due can be established from the contractual terms, such as through:

• A fixed formula
• Agreed performance targets
• A defined commission structure
• An award that has already been declared

Where the payment remains genuinely discretionary and no particular sum has become due, the legal position can be more complicated and a different type of claim may need to be considered.

What Are the Time Limits for a Bonus Claim?

Employment Tribunal deadlines are strict.

For claims where the relevant time limit begins before 1 October 2026, an unlawful deduction from wages claim will generally need to be started within three months minus one day of the date on which the payment should have been made.

From 1 October 2026, where the relevant time limit begins on or after that date, the general limitation period for most Employment Tribunal claims increases to six months minus one day.

Before presenting most Employment Tribunal claims, you must normally notify Acas and go through the Early Conciliation process.

Starting an internal grievance does not normally stop or extend the Employment Tribunal time limit.

You should therefore obtain advice promptly rather than waiting for the internal procedure to finish.

Can You Bring a Breach of Contract Claim?

A failure to pay a contractual bonus may also give rise to a breach of contract claim.

An Employment Tribunal can consider certain breach of contract claims after employment has ended.

The Tribunal can currently award a maximum of £25,000 for a breach of contract claim.

Where a claim exceeds that amount, or where Employment Tribunal jurisdiction is otherwise unavailable, civil court proceedings may need to be considered.

In England and Wales, the usual limitation period for a straightforward breach of contract claim in the civil courts is six years from the breach.

Different limitation rules apply in Scotland.

The appropriate route will depend on the amount claimed, whether employment is continuing and the legal basis of the dispute.

When Should You Seek Advice About a Bonus Dispute?

Bonus disputes can involve significant sums and complicated contractual provisions.

Legal advice can be particularly important where:

• A large bonus has been withheld
• Your employer says the bonus was discretionary
• You were dismissed shortly before the payment date
• You have been placed on garden leave
• Your employment was terminated using PILON
• Deferred shares or RSUs are at risk
• Good leaver status is disputed
• You believe discrimination affected the bonus
• You are considering resigning
• A settlement agreement is being negotiated
• An Employment Tribunal deadline is approaching

The strength of a bonus claim will usually depend heavily on the wording of the contract and scheme, together with the way the employer exercised any discretion.