In a nutshell

Pay and benefits are an essential part of the employment relationship. People are paid, rewarded and recognised for what they do. This starts from when they are offered an employment contract right through until they leave the organisation, so it is essential that pay and benefits are managed effectively for the benefit of both you and your employee.

You are obliged to confirm the level of pay and relevant benefits in the contract of employment – including hourly or annual rates, levels of holiday pay, pension rates, dates of payment etc. It is good practice to highlight key elements in the offer letter for clarity, but you need to be careful of what you put in either document to prevent issues or misunderstandings around contractual and non-contractual pay and benefits. Bonuses, for example, would be deemed contractual if they are stated in the contract of employment. It is therefore advised that you state how reward is managed outside of the contract; this can be resolved by creating a reward policy or statement that can either be stand alone as an HR policy document or part of an employee handbook. The reward statement or policy should advise employees about how they are paid, how often and any other relevant information around statutory requirements. This should also include any relevant pension information, as well as guidance concerning leave (which could be covered under separate policies relating to that type of leave, for example absence or maternity).

It is essential to also make the appropriate calculations regarding pay and benefits when employees leave the organisation. This needs to be managed carefully and appropriately, dependent on whether the individual leaves of their own volition, via a restructure or dismissal. You have obligations under each scenario and you need to be aware of these, as contractual and non-contractual pay or benefits will need to be calculated. You may also be liable for 'Pay In Lieu of Notice' (PILON) or 'Pay in Lieu of Benefits' (PILOB) obligations.

What are the risks?

You need to ensure you are providing the right pay and level of benefits to your staff, as both a contractual obligation and as per employment legislation. Not only does this prevent issues around Equal Pay reporting but also with regards to other areas of potential discrimination or risks surrounding breach of contract. Treating and rewarding people fairly helps retain your staff but also helps you become recognised as an employer of choice.

Key steps to manage this issue

1. Get the essentials right

The first step to offering the right pay and level of benefits to your staff is to get the essentials in place with regards to contracts, levels of pay and payment dates. Use the following points to help you get these essentials in place:

  • Ensure that pay and benefits are covered appropriately in the employment contract.

  • Benchmark pay or salaries to ensure they are competitive – you can do this by researching competitors or using websites such as Indeed to get a feel for market rates, packages and benefits.

  • Implement a reward statement or policy, with relevant guidance/advice included – this should include information about insurance providers, pension providers and any guidance relating to bonuses etc.

  • Ensure staff are aware of relevant pay dates or potential changes to these – this is something that is required in the employment contract, so you should let them know what dates pay is due, if it is in advance or arrears, when any bonus might be paid etc. This could be handled via a reward policy or employee handbook.

  • Be clear on the contractual and non-contractual elements of pay or benefits – this means you need to state the salary, pay schedules and pension obligations but keep bonuses, insurances and other benefits that you believe sit outside the contract separate and provide guidance on these as part of their starter pack or employee handbook.

On 6 April 2019 two important changes to the Employment Rights Act 1996, affecting pay slip information, came into force:

  • Employers must include the total number of hours worked where the pay varies according the hours worked, for example under variable hours or zero hours contracts.
  • Payslips must be given to ‘workers’ and not just employees. There's more information about employees, workers and employment status on the Contracts and employment status page.

The government guidance on the new requirements can be found on the Gov.UK website.

2. Bonuses

You should consider carefully if a bonus is something you wish to use. It is not something that is required and you need to be careful how you use bonuses. You can use a bonus for some teams and not others (such as sales versus operations staff), but you need to take care about how you define this and that salaries/packages are benchmarked against the labour market. You can consider the following points when deciding whether, and how, to offer bonuses:

  • Ensure that staff understand the bonus criteria and that it is fair/appropriate
  • Be mindful of including bonuses as part of any contractual agreement
  • Provide guidance to staff regarding bonuses via a handbook or policy
  • Communicate relevant bonus timeframes to ensure understanding
  • Ensure part-time and maternity/paternity cases are not discriminated against – to put it simply you should consider pro-rata bonuses or ensure that they receive at least a median level of bonus whilst on family leave
  • Manage bonuses appropriately so that they do not simply become a custom – this means you need to communicate any changes to bonus structures, make sure they are not contractual and that you engage staff regularly regarding any bonus structures in place.

3. Performance related pay

Performance related pay can be used to help encourage and also recognise those who work hard to perform for the organisation. It is also a way for organisations to benchmark the performance of their employees and ensure that performance is assessed against tangible rewards.

  • Any performance related pay should be defined and circulated to employees.

  • Make sure that the criteria is relevant, appropriate and non-discriminatory – this means you think about rewarding people against agreed levels of performance, reviewing and discussing these during the assessment cycle and making sure you use pro-rata reward to prevent potential discrimination.

  • Use a robust framework to assess any performance related pay – this means using appraisal and performance reviews appropriately with effective scoring, evidence and defined review periods to ensure it works effectively as a process.

  • Assess and feedback regularly on progress throughout the assessment period.

  • Work with employees through assessment process to ensure buy-in.

  • Ensure any awards take into account part-time, equal pay or parental needs – in simple terms you should consider pro-rata pay, ensure that you do not purely favour those on full hours as this might result in indirect discrimination based on gender, and you ensure your approach to performance related pay is ethical.

4. Non-financial reward

When planning your reward package for your employees, it’s worth considering including non-financial rewards. These can be excellent retention and development opportunities and can allow you to compete in the marketplace for the best staff. Think about the following:

  • if professional membership or education is included ensure criteria are in place
  • ensure an appropriate payback period is in place to protect the company
  • inform employees of payback clauses and ensure they sign an agreement
  • consider publishing non-financial rewards covered and communicate this to staff
  • ensure any payback required is managed via the exit or notice period
  • consider staggered repayments if full payment is not possible.

5. Benefits

In addition to pay you will need to fulfil your duties as an employer with regards to pensions and other benefits (eg insurance). You can find out everything you need to know about enrolling your employees on a pension scheme on the Gov.UK website but make sure you cover about these key points:

  • provide relevant pension advice and guidance to all new starters
  • ensure employees know who to contact relating to pensions and insurances
  • consider providing a benefits handbook or cover benefits in the employee handbook
  • check that any benefits are legally compliant as per HMRC regulations
  • make sure any policy updates are shared with employees
  • review and benchmark your benefits against the market for currency/compliance.

6. Holiday pay

Holiday pay should form part of your planning when you’re looking at your pay and rewards offering: there’s more information about holiday pay in the Holiday section but it’s worth considering the following:

  • make sure that any holiday awarded meets the legal minimum
  • advise on whether Bank Holiday and Public Holidays are included
  • ensure holiday is accrued and calculated properly for all staff
  • be careful when calculating holiday for contractors and part-time staff
  • remember to include holiday as part of any payment of notice or redundancy
  • use annual holiday periods and ensure it is taken or remunerated appropriately.

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