Performance related pay, bonuses, commissions and tips

Often an employer will want to reward employees in ways other than by the payment of a fixed hourly rate. This may be to reflect the variable nature of the work, to give employees an incentive to work harder or simply to allow the employee to benefit from increased earnings of the employer or gratuities from customers and clients. Performance related pay, commissions, bonuses and tips are a number of the ways in which this can be achieved, and this section looks at some of the issues involved. For further information, contact us at employmentlawhelp.

Performance related pay

What is performance related pay?

Performance related pay is one means by which an employer can reward staff by reference to how well they do their job or how effective they are in relation to the profitability of the company or business.  It works by linking an employees pay to their progression within the business and usually operates by measuring the employee against predefined objectives which are assessed by means of appraisals and performance reviews.  It can operate either at an individual level - where each employee has their own measured criteria - or it can operate at a departmental or group level - where the overall performance of a number of people is reviewed.

Performance related pay was seen by many employers as a means of:

• motivating staff to do better,
• getting away from the system where employees were paid on the basis of length of service rather than ability,
• encouraging better staff to remain with the company, and
• more fairly distributing wages.

However, in recent years many firms have begun to move away from basic performance related schemes and have now started to implement either skills-based schemes or have develop more complex schemes which take account not only of the employees performance but also their overall contribution to the workplace, attitudes and motivation - assessed often through more complex appraisal processes.

Concerns about performance related pay

If you are an employee and you have concerns about your scheme or about the way in which it applies to you then you should look initially at your contract of employment and decide whether or not the scheme is being applied to you correctly.  If your company is not doing so then they may be in breach of your contract of employment.  Bear in mind, however, that it may be difficult for you to demonstrate that they have not adequately taken account of all relevant factors in assessing your pay and that it may, at the end of the day, come down to a disagreement as to whether you have performed adequately. For that reason it is essential that you explore all internal, grievance related solutions before taking the matter further in the tribunals or courts.

If you are an employer, then you may wish to consider the contractual and other ramifications of introducing such a scheme before doing so.  employmentlawhelp can assist you with this.

Commissions and bonuses

How do commission and bonus schemes operate?

Like performance related  pay, commissions and bonuses are a means by which an employer can reward staff for their performance at work.

There are essentially two main types of scheme in operation:

• short-term schemes which provide the employee with a bonus or commission payment based upon, for example, how many sales they, or their team or department, achieve during a given period. Thus, a department selling advertising may receive a bonus of £x for every £1,000 of advertising revenue generated, and
• longer-term schemes where an employee or department receives either salary enhancements or possibly share-options in return for improvements in overall performance when compared with previous review periods.

Problems with bonus payments

The payment of a bonus or commission is usually a contractual matter.

If you are an employee and you have not received a payment which you believe you should have received, then it is the same as not being paid part of your salary. You should start by checking the terms of your contract or consulting, where available, the staff handbook to see how and when your bonus is paid. Raise the matter with your employer and find out if there is a reason.  It may simply have been a mistake.  Request a copy of your employers calculation and make sure you keep copies of any correspondence, or notes of any meetings, in case you need to refer to these at a later date.

Bear in mind that sometimes bonuses are at your employer’s discretion - that is to say it is up to the employer to decide who will receive a bonus and how much that bonus will be. If this is the case then you may need to take steps to demonstrate that your employer has not been reasonable in determining your bonus.

If you are still not satisfied that the correct bonus has been paid then you may need to bring proceedings against your employer for breach of contract, unlawful deduction from wages or even unlawful discrimination (if, for example, bonuses have been paid to others of a different gender, race etc.).  If this is the case, contact employmentlawhelp and we will be happy to advise you.

If you are an employer, you should ensure that when operating a bonus or commission scheme that you do so fairly and equitably, and that in particular you do not commit a breach of contract, make an unlawful deduction from wages or operate the scheme in a discriminatory manner.

Discrimination and bonus payments

Employers must ensure that they do not discriminate against individual employees or groups of employees when making bonus payments.  In particular, you should remember that discrimination can be both direct and indirect and that rewarding all, or the relevant part, of the workforce in such a way that certain members of it cannot take the benefit because of disability, gender, race etc. will be equally as discriminatory as if you had a policy not to pay bonuses to those people. For more information on avoiding discriminatory payments, contact employmentlawhelp.

Bonuses and the end of your employment

In the event that an employee’s job with a company comes to an end, for whatever reason, then usually that employee will be entitled to all bonuses earned up to the date they leave.  However, the provisions of the contract should be checked carefully in relation to this.  As an employer you should ensure that a contract is clear as to what should happen on the termination of employment.

Tips and Gratuities

Tips and gratuities are payments made by customers and clients to reward the service which they have received from a particular worker or group of workers. Most often they are paid to workers in restaurants and hotels and the service sector - for example hairdressers and taxi drivers.

Tips can be distributed to workers in a number of ways:

• directly from customers and clients to the employee, so that the employee receives the tips which they have earned,
• as a share of a pooling arrangement, so that all employees benefit equally from the tips received,
• as a part of the employees wages - for example where wages are made up by the employer from tip receipts,
• not at all - where the employee receives a fixed amount and all tips go into the employers accounts as, for example, service charge.

The custom in your particular employment will dictate how tips are dealt with.  For example, the employer, particularly if it is in the hotel or catering trade, might operate a  ‘tronc’  - that is to say an arrangement for the pooling and distribution to employees of tips, gratuities and service charges.  The person who distributes monies from the tronc is known as the troncmaster and where such a scheme exists responsibility for operating PAYE on the distribution may lie with the troncmaster rather than the employer.

Currently there is a common practice within the hotel and restaurant trade for employees to be paid less than the minimum wage and for that pay to be made up from tips and gratuities.  This is legal at present but is likely to be outlawed under new legislation to be brought in during 2009.

For more information, or if you have a specific problem with which you would like some help, either phone employmentlawhelp on 084 4804 4800, request a free, no-obligation call-back using the form to the right, or email us on advice@employmentlawhelp.co.uk and we will be more than happy to discuss with you the precise needs which you have.