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HMRC internal manual

Employment Income Manual

Employee Ownership Trusts – qualifying bonus payments: The equality requirement

Section 312C ITEPA 2003


The equality requirement is that every employee  who participates in an award under a scheme must do so on the same terms. 

The manner in which the award must be determined is restricted.  The award must be determined by reference to the factors listed in section 312C(6).  These are:-

  • the employee’s remuneration
  • the employee’s length of service
  • hours worked by an employee.

If any other factors are used, the equality requirement is infringed (section 312C(5)).

The scheme must provide that the employees participate on the same terms but this does not mean they have to receive the same amounts.  If a bonus scheme is based on remuneration, for example, the terms may be that the employees will receive £100 bonus per £1000 of salary (rounded up to the nearest £1000).  An employee earning £15000 will have an entitlement to a qualifying bonus payment of £1500.  An employee earning £25000 will have an entitlement to a qualifying bonus payment of £2500.  The amounts paid are different but the terms are the same. 

If more than one of the above factors is used, the award must consist of separate elements in respect of each factor.  Each factor must give rise to a separate entitlement and the total entitlement to the award must be the sum of those separate entitlements. 

If a scheme was developed which calculated the bonuses by using a formula such as 3% of salary multiplied by the total number of years worked, an infringement has taken place.  The scheme produces a single result using more than one of the above factors. 

If the scheme provided for a bonus of 3% of salary plus £100 per year of employment, there are two separate entitlements.  This would produce an award equal to the sum of those two entitlements so no infringement has taken place. 

The equality requirement is infringed if the award is made on terms that some (but not all) of the participating employees receive nothing (section 312C(7)). 

The equality requirement is also infringed if any feature of the scheme either has or is likely to have the effect that its benefits are wholly or mainly conferred on:-

  • directors or former directors
  • employees receiving the highest levels of remuneration
  • those employed in a particular part of the company or group
  • those who carry on particular kinds of activities.

An infringement will occur in a number of ways if companies or groups of companies have differing bonus pots based on the profits of parts of the individual company or group.  Such a calculation would use a factor other than the employee’s remuneration, length of service or hours worked to calculate the bonus.  It could also result in no bonus being paid by a group company which had either generated no profits or made a loss.  The terms are such that some of the participating employees will receive nothing.  It may mean that the benefits are conferred mainly on employees working in a particular part of the group.

The above provisions apply to awards made to former employees.  When considering awards for former employees, all references to remuneration, length of service, hours worked, being employed in a particular part of a business or carrying out particular activities are to be read as relating to the former employment.


Q:  Does ‘hours worked’ relate to contracted hours?  It would mean those employees on zero hours contracts wouldn’t receive any bonus payment and this would seem completely at odds with the legislation.  Alternatively, if the payment is based on actual hours worked, rather than contracted, does this mean that employees who are off work through illness/maternity leave can legitimately receive a lower bonus payment on the basis they haven’t worked the hours?

A:  The reference to ‘hours worked’ is not specifically defined so it must be construed in accordance with its natural meaning.  The scheme rules could provide that the amount of the bonus payable will be calculated (in part) by reference to contracted hours – e.g. so that employees who have been absent due to illness or maternity leave are not disadvantaged – without infringing the equality requirement.  However, if the employer has employees who are eligible to participate in the scheme on zero hours contracts, then such treatment is likely to breach the equality requirement.