Many bonus schemes are referenced to performance periods, but
awards will not be paid unless employees are in employment on the
date of payment. For example, a bonus is referenced to company
profits for year ended 31 December but is not paid until the
following 30 June. Employees who worked for the employer during the
performance year forfeit their entitlement if they leave employment
before 30 June.
Up to 28 February 2008, HMRC took the view that the bonus
award could only be “for” the year in which unfettered
entitlement to receive it arose. The year that the bonus was
“for” was the year in which the employment condition
was satisfied. Since 28 February 2008, HMRC has adopted the
principles set out in EIM40008 and subsequent pages.
Many of the plans with employment conditions identify
“good” and “bad” leavers and prescribe
different treatments for the two categories. “Good
leavers” are employees who cease employment before the bonus
payment date through retirement, redundancy or ill-health.
“Bad leavers” are those who are dismissed for cause or
resign to join a competitor.
It is possible to take various views on the year that such
bonus awards are “for” where there is an employment
condition:
Your decision should take account of what the bonus scheme is
intended to achieve. If this is not clear from the documents, you
may base judgments on how the employer treats good and bad leavers.
Plans that:
are likely to pay out awards that are “for” the
original performance period. However, if the Plan introduces
additional performance conditions for the second period the period
that the award is “for” is likely to be the aggregate
of both periods.
If “good leavers” are entitled to receive
awards; that may indicate that the awards are “for” the
original performance period. Entitlement to pro-rated awards may
indicate that entitlement is “for” the performance and
the vesting periods.
Some schemes provide for deferred bonuses to be paid out
when ownership of the company changes hands. This may be an
indicator that the bonus is earned by that date and is
“for” the relevant performance period.
Even though these contingencies may not occur for all or any
of the plan participants, their existence may shed light on the
period the bonus is intended to be “for”.
It is sometimes argued that the employment condition is
never just about being in employment on the specified date; that
the intention of the employer in introducing this condition is to
obtain satisfactory performance in the period ending on the date of
payment. This may well be the case. If evidence can be found to
support the contention you should accept that the period the awards
from the Plan are “for” is the combined performance and
vesting periods.
Some bonus schemes give the employer absolute discretion to
award or refuse to award bonuses. The discretion may lie with the
trustees if an Employee Benefit Trust (EBT) pays out the awards.
The Courts have held that, whatever the Plan says, an
employer’s discretion in awarding or withholding a bonus is
not unfettered. However wide the discretion appears to be, the
employer is required to exercise his discretion rationally and in
good faith, and not irrationally or perversely.
There may be a pattern of awards that may indicate the year
the awards are “for”. Employees may also have an
understanding of how the bonus scheme works, and the period awards
are referenced to, while accepting the employer’s discretion.
A discretionary bonus may therefore be “for” the
performance period, the combined performance and
“vesting” period or the year in which discretion is
exercised and payment is made. It is important to consider all of
the relevant information.
