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Income inequality, discriminatory business performance bonuses

Article published in Direktor magazine no. 43, Winter 2019

Income inequality

Employment discrimination, the #MeToo movement, and the gender wage gap have become frequently discussed topics. Unfortunately, inequality in terms of employment and equal pay for equal work has not decreased despite various introduced measures. The latest report from the International Labour Organization (“ILO”) reveals that women in Slovenia receive 7.6 % lower average monthly income than men. It is worrying that of all the EU member states, Slovenia has seen the most significant wage gap increase. In 2010, this gap was less than one percent.

The occurrence of income inequality is predominantly the consequence of certain sociological factors. Society still views women as caregivers. Over 95% of the people in Slovenia claiming parental leave after welcoming a child are women. Another contributing factor is that the fields predominantly employing women tend to be lower-paying than the traditionally male fields. There are also lower percentages of women occupying the top paid positions in companies.

However, a wage gap can also occur due to prohibited discrimination, which is the topic of this article.

Income inequality as the consequence of workplace discrimination in practice

I usually spot prohibited discrimination when reviewing a company’s policies and the criteria for promotions and bonuses. The criteria for promotions and rewarding as prepared by the employers are often discriminatory in that a group of people with a specific personal circumstance has a more difficult time achieving the set criteria compared to the group of people not limited by said circumstance.

It has been my experience that employers do not consciously decide to put, for example, female employees in an inferior position just because they are women. Employers usually want to set fair criteria and are often not even aware that they are distinguishing between employees based on their personal circumstances. They also often believe that they are free to set any kind of benchmarks they see fit when it comes to voluntary remunerations, such as rewards, bonuses, and Christmas bonuses, because these are thought to be voluntary and additional payments.

This kind of assumption is mistaken. Even voluntary and bonus payments require you to act in accordance with antidiscrimination laws. It is important to note here that determining the existence of prohibited discrimination is not founded on the subjective attitude of the employers. An employer violates antidiscrimination rules with all the ensuing legal consequences even if they had no intention of discriminating.

How to set criteria for business performance bonuses?

Ever since business performance bonuses have been receiving more favourable tax treatment, more and more employers are choosing to pass regulations on business performance bonuses and awarding them. It is important to understand that a business performance bonus constitutes part of a salary, because its payment is based on the employees’ past work. But it also stems from an employment relationship and any adopted internal regulations must take into account legislation regarding taxation as well as labour laws.

Taxation legislation stipulates only that the criteria must be unified for all employees and that they must be defined in the appropriate internal regulations and the collective agreement. The details regarding these criteria, however, are left up to the employers, if they are laid down in a general policy, or are agreed upon during negotiations with the union, if they are set in a collective agreement.

Labour law must be taken into account when preparing the criteria. Employment relationships protect against discrimination. This means the employer must set the criteria for business performance bonuses, as well as any other criteria for promotions and rewarding, in a non-discriminatory manner.

Common examples of business performance criteria

Regulations for business performance bonuses often set criteria such as

In the event of a positive annual balance, the company will award employees who have been present for at least 1900 qualifying hours a business performance bonus in the amount of one average monthly wage of the employee in a business year.

In practice, the bonus is therefore usually tied to a specific basic criterion that relates to business performance (turnover, profits, produced volume) of a company and the precondition for the right to a bonus is usually an ongoing employment relationship and the qualifying presence (or absence) of an employe in a current year.

It is precisely this kind justification to a bonus based on the employee’s presence or absence in the current year that can place a group of employees with a certain personal circumstance in an inferior position compared to those who do not have this personal circumstance, if the employers do not take into account the reasons for the employees’ absence when setting the criteria.

It is important to understand that absences resulting from pregnancy, parental leave, and medical reasons constitute these personal circumstances. These must not be the basis for the unequal treatment of workers. Even though certain criteria may seem neutral at first glance: it is determined, for example that employees will be entitled to a bonus if they are present at least 1900 hours; this kind of seemingly neutral criterion will be more difficult to achieve for some employees with a specific personal circumstance (parenthood, medical reasons). This will result in indirect discrimination of a specific group of workers, which is prohibited.

The question is whether the employer may in any way take into account the absence of employees that was the result of personal circumstances. In other words, is the employer obligated to pay employees who have been absent for medical or personal circumstances the bonus in its entirety or is it in line with antidiscrimination regulation to pay the bonus pro rata.

EU Court case law indicates it is permissible that employees who have been present during the entire calendar year are entitled to a business performance bonus in its entirety and those who were absent due to parental leave or medical reasons are entitled to a pro rata bonus in accordance with their presence.

On the other hand, the employer may determine that a worker is not entitled to a bonus if they have been absent for reasons that do not stem from personal circumstance, such as extraordinary unpaid leave, sabbatical leave, or because the employee has only been employed for part of the year.

With all of the media attention on resounding global instances questioning (non)discrimination, it would be reasonable to assume that Slovenian employees will also become increasingly aware of this, posing the question of whether they find themselves in an inferior position relative to their co-workers because of the nature of the criteria for promotions and rewarding. In addition, business performance bonuses are projected to receive even more favourable tax treatment, leading more employers to opt in.

All of these various factors should prompt employers to prepare the relevant criteria with the appropriate diligence. This may be the only way to avoid any liability and obligation for discrimination remuneration. In certain cases, internal regulations or stipulations in collective agreements that are the bases for business performance bonuses many even be invalid, which could also have tax law consequences.