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Bonus scheme blues – Part 2: maternity leave

Consider this scenario:
During the last financial year your company exceeded its performance expectations and, as a result, decided to pay all staff a bonus of 25% of salary. One of your employee’s Ms X is on maternity leave. Is she entitled to:
(a) the full bonus as if she was still at work; or
(b) no bonus; or
(c) a pro-rata bonus based upon the proportion of the year she worked;
(d) a pro-rata bonus as at (c) plus two weeks;

The correct answer is D …. probably!

Unfortunately, due to continued uncertainties in this area of law there is no simple answer; much depends on the nature of the bonus in question. In this month’s Working Times we take a closer look at this complex area of law and ask:
When is a woman on maternity leave entitled to a bonus?

The starting point for answering this question is to look at the rules relating to maternity leave. During ordinary maternity leave (OML), all terms and conditions are preserved, except those relating to “remuneration”, defined for this purpose as sums payable “by way of wages or salary”. In theory therefore, the employee remains entitled (in full) to any bonus that falls outside this definition. During additional maternity leave (AML), only very limited terms and conditions are preserved; none of these can be construed as including a bonus.

In Hoyland v Asda Stores Ltd [2005], a bonus was expressed to be discretionary but in practice was paid annually to all eligible employees through the normal payroll, with deductions for tax and national insurance contributions. It was also pensionable. The EAT held that the bonus was “wages or salary” and was therefore excluded during OML.

EU law and article 141

Recent case law has shown that the most important rights in this area are not found in the rules governing maternity leave, but in sex discrimination and equal pay law, particularly article 141 of the EC Treaty, which guarantees equal pay between men and women. “Pay” includes all payments in connection with employment including bonuses, whether contractual or voluntary Lewes v Denda (2000).

In Lewes, the ECJ held that an employer could not simply refuse to pay a bonus to a woman on maternity leave, where it constitutes retroactive pay for work done. However, it can make a pro rata reduction to take account of the leave, ignoring any time during which the employee is legally prohibited from working (which in UK law means the two week period of compulsory maternity leave (CML) under s.72 of the ERA). The ECJ also ruled that total non-payment of a bonus during maternity leave would not be a breach of article 141 where the only condition is that the employee is in “active service” at the time of payment and seemed to suggest that this might include cases where the bonus was paid as an incentive for future work and/or loyalty to the company.

Sex Discrimination Act 1975 (SDA)

In the UK, discrimination relating to contractual entitlement to remuneration is usually dealt with under the Equal Pay Act 1970, and all other discriminatory treatment (including the discriminatory exercise of discretion) is usually dealt with under the SDA.

An employer discriminates against an employee if it treats her less favorably than it would otherwise have done on the basis that she has exercised or sought to exercise her statutory rights to maternity leave, or on the grounds that she must take compulsory maternity leave (s3A(1)(b) SDA). However, the SDA does not apply to claims for benefits that are “regulated by” the contract of employment, or remuneration (which is defined as “wages or salary”) during OML or AML, unless it relates to a time outside the OML and AML periods (s6A SDA). This appears to be an attempt to import the Lewes principle into the SDA so as to require a pro-rata apportionment of annual bonuses that constitute pay for work done. CML is not carved out and, to that extent, section 6A does not fully implement EU law and the Government has been ordered to amend the legislation in the light of Lewes (Equal Opportunities Commission v Secretary of State for Trade and Industry [2007]).

There is, however, an overriding limiting factor; by virtue of section 6(6), the SDA does not cover “benefits consisting of the payment of money when the provision of those benefits is regulated by the woman’s contract of employment”. In Hoyland, the Court of Session held that the entitlement did not need to be part of the formal contract, provided that it was regulated by it in the sense that “but for the existence of the contract of employment the bonus would not be paid”.
Equal Pay Act (EqPA)

Cases that fall outside the SDA because they are regulated by contract will fall within the EqPA. Section 1(2)(e) of the EqPA provides that any “terms… as to pay by way of bonus” in an employment contract are deemed to include an “equality clause” which provides (so far as relevant) that “pay by way of bonus” in respect of any time before maternity leave, when an employee is absent on CML, or after she returns to work following statutory maternity leave must be paid when it would ordinarily have been paid but for her having taken statutory maternity leave.

In short, as it stands under the SDA, women on maternity leave can bring a claim for a full bonus only where that bonus is not regulated by their contract and is not “wages or salary” (e.g. possibly a one-off discretionary bonus to encourage future loyalty). In practice, such bonuses are rare.

Performance-related bonuses (whether based on individual, team or company targets) and other regular bonuses such as a Christmas bonus will usually be treated as deferred pay for past work, and are therefore likely to fall within the EqPA (see Hoy/and). Employers should therefore include provision in any written scheme for a pro-rata apportionment to employees on maternity leave.

Returning to Ms X; because the bonus relates to the performance of the company during the previous financial year, it is likely that Ms X is entitled to a pro-rata bonus based upon the proportion of the financial year she worked before her leave began, plus an extra two weeks to take into account the two weeks CML allowed for by the EqPA.

If you would like any more information about this, or related employment matters, please do not hesitate to contact Adrian Berkeley or Anthony Middleton on 0161 371 0011 or by e-mail:

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