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Lords are being suspended and MPs are resigning over expenses. Are we entering a new era with the focus firmly on expenses and bonuses eclipsing salaries and annual reviews? asks Pam Loch.

Reclaiming the cost of horse manure, moat cleaning and repairing a portico on expenses by MPs have drawn attention to the potential opportunities to abuse expenses. The public horror that ‘our’ money has been abused to purchase these goods and services has fuelled the fire of anger.

It has also led to many more conversations about expenses and what you can and can’t do. What seems to distinguish Parliament though, is that the rules on expenses exist but they are not reviewed regularly, and loopholes are not shut down.

In most organisations nowadays expenses are usually monitored very closely with rigid policies and numerous controls in place to ensure compliance with procedures to avoid abuse taking place. The employee’s contract of employment will set out that expenses are payable but only if the expense is incurred in accordance with the expenses policy.

The expense policy should clearly set out what is regarded as an expense by the organisation. It can be difficult to set out specific examples and usually there will be a generic reference to what is covered and then it is over to accounts, HR, or whoever is given the responsibility to approve expenses.

The person who approves expenses plays an important role. Not only must they interpret how the policy applies but they must resist the pressure that can be placed on them to agree that something is a legitimate expense.

In some sectors there is far less rigidity and expenses policies may have limited application. One could take the view that this is not really an issue to be concerned about, as it only impacts on the organisation itself. However, that is not the case. Expenses are generally a tax-deductible business expense as long as it is not for entertaining clients or customers.
Therefore, HMRC also has certain rules that apply to ensure there is no abuse of the tax system.

An abuse of an organisation’s expenses policy usually results in disciplinary action being taken and ultimately could lead to an employee being dismissed. Despite the potential risks, however, some employees will stretch the boundaries of expenses for the sake of securing extra funds that are not taxable.

For example, some employees will arrange a meeting in a city they would like to spend the weekend in to be able to reclaim the cost of the travel. In other instances, personal and business expenses become closely entwined – visits to lap dancing clubs being one example.

The cry from MPs is that if they were paid properly then they would not have to resort to relying on the expenses system. Could this be the same for other organisations?
In the past, remuneration packages consisted of salary and benefits with a menagerie of benefits. In recent years there has been an increasing focus on bonuses playing a significant part in the remuneration of employees. MPs, of course, have not benefitted from this.

Bonus arrangements have become an increasingly common element of remuneration packages. The main reason for this is that they have been an effective tool to motivate and incentivise employees – a lawful performance enhancer.
onus schemes come in various guises and they do not all give certainty of payment.
The main types of bonus schemes are:

•non-contractual bonus arrangements;
•contractual bonus schemes with discretionary terms; and
•contractual bonus schemes with contractual terms.

The courts have increasingly been persuaded that bonus schemes, designed to be non-contractual or discretionary arrangements, actually do give rise to contractual or quasi-contractual rights. Consequently, legal advice on the terms has increasingly played an important part when disputes arise.

For employees, their ideal scenario is a contractual bonus they can enforce. Many employers, however, prefer the discretionary approach, believing it can provide flexibility to pay less and reduces the scope for an employee to pursue claims.

With discretionary arrangements, the employer is trying on the one hand to reassure the employees they have a good opportunity to earn a bonus, and on the other hand using the bonus as a carrot to recruit employees or retain them. At the same time the employer will want to avoid giving any guarantees to a bonus.

A discretionary entitlement, however, could become a contractual one if custom and practice come into play. If an employer has paid bonuses on a regular basis, assessing it on a similar basis each time, an employee can argue they now have an implied contractual entitlement to the bonus.

To achieve certainty, many employees negotiate contractual bonuses, assessed against certain achievements. The employees then have the ability to enforce their entitlement to a bonus on the terms they negotiated.
Fit for purpose?

If the bonus arrangements have been designed well then they should incentivise the employee, and the employer should benefit from their good performance. In addition, if the employee's productivity is poor due to the economic climate or their own performance, the employer should not be exposed to the downside.

Problems can occur when the bonus schemes have been poorly negotiated and/or been badly drafted. The employer could then find it has a bonus scheme that has become a drain on the business and in some instances a magnet for bad press.

Is the solution to increase basic salaries and remove the scope for abuse? One size does not fit all and the reality is that for some organisations the benefits of having expenses and bonuses far outweigh the negative aspects.

The challenge is to have a bonus system that works and incentivises employees and an expense system that is not open to abuse. There will be many contemplating this in the Houses of Parliament for the foreseeable future.