Cost of living bonuses | What employers need to know before providing financial perks

Written by Hannah Copeland and Toyah Marshall on 7 October 2022

When it comes to enhancing employee satisfaction and retention, companies giving cost of living bonuses and financial perks have become a prevalent practice. In this blog, we’ll uncover what employers need to know before offering cost of living bonuses for employees, as well as other financial perks that resonate with your workforce.

As well as fretting about their own energy bills, businesses across the UK will be acutely aware of the financial difficulties their staff are currently facing, and may feel a sense of responsibility to step in.

Despite the government introducing measures to limit the effect on households, many will still be watching their wallets as we head into autumn, with millions already starting to feel the effects.

Conversations around cost of living concerns will naturally make their way into the workplace, as people look to their employers for support. Already, big-name companies are announcing an array of financial initiatives to help employees combat the biggest income squeeze on record.

Metro Bank recently confirmed plans to give a 2.75% pay rise to 98% of its employees, while John Lewis has begun providing free meals to help staff’s budgets stretch further. Others have introduced perks such as interest-free loans, gift cards, shopping discounts, one-off bonuses, and even emergency hardship loans.

Clearly, employers are keen to do something support staff in the current climate. But what do you need to know before rolling out financial benefits like these? In this blog, we take a look at three types of initiatives you may be contemplating to help you weigh up whether they are right for your business, as well as avoid legal risks.

1. A general review of pay and benefits

Employee needs have changed. As such, an incentive and reward package that worked a decade ago might not cut it today. With both businesses and their staff feeling the pinch, it may be an opportune time for a compensation and benefits review.

As well as helping employers to keep control over their own costs by ensuring money isn’t being wasted on benefits that nobody really wants or cares about, reviewing your pay and benefits package will help you to optimise your current offering based on what really matters to employees right now, namely money.

Indeed, with money worries at the forefront of many people’s minds, a recent survey found overtime to be the most in-demand work perk, followed by flexible working hours and company-funded retirement plans. With all three directly benefiting employees financially, it seems clear that these are the sorts of incentives employees value most in the current climate.

To rethink and revitalise your employee benefits package during the cost of living crisis:

  • Start by setting clear objectives. What do you want to achieve from an organisational and employee perspective?
  • Identify employees’ needs. How do employees feel about your existing benefits? Use surveys and focus groups to obtain employee feedback.
  • Conduct an external analysis. What sorts of benefits are your competitors offering and how do yours compare?
  • Dive into the data. Back up decisions with actual data from your HR systems. Which benefits are being utilised the most? Which are proving the most cost-effective?
  • Communicate. Once you’ve reviewed your offering and refined your benefits package, make sure employees know what’s available to them and really sell the value of those benefits.
  • Measure success and ROI. Review your benefits package annually to ensure it remains relevant and affordable, replacing unpopular benefits with new ones.
  • Be inclusive: Remember to consider the diversity of your workforce and the needs of different groups within it.

As well as ensuring your benefits package resonates with employees during this period of financial hardship, an up-to-date, competitive employee benefits package is a great way to attract and retain talent – another major challenge for businesses right now.

Note that, from a legal perspective, it’s important to make sure that any benefits you’re looking to change don’t form part of an employee’s contract of employment. If they do, then you would need to undertake consultation with the staff to get their agreement to make these changes in advance.

Changing benefits is one matter, looking at changing pay in response to a rise in cost of living is another consideration altogether.

It’s a great time to consider whether your pay is competitive in the external market and make sure that you have a well-defined pay structure which aligns to the outcomes of job evaluation. That said, it’s prudent to consider whether giving a pay rise is the right way to solve the cost of living crisis. We would suggest that it’s not.

Not only does it lead to a situation where salaries become out of line with the market data or with skills required for the job, it means that things like the gender pay and any existing salary disparities run the risk of becoming exacerbated.

If a salary raise is the answer, then it must be approached on a basis that can be sustained longer term; does a pay rise now mean no more pay rises for the next five years? It must also be awarded on a scientific basis – meaning that there must be some thought and objective criteria which determined the raise.

Perhaps something more sustainable would be the consideration of bringing pay reviews forward. Can you award an annual pay rise six months early? Could you pay it before Christmas and ease the burden over the winter months when cost of living will reach its highest level.

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2. One-off bonus payments

Some employers are looking to pay a one-off bonus payment to provide temporary financial relief this winter. This tends to be an ‘across the board’ gesture.

The problem is that in some cases, this is being done as a knee-jerk reaction and is symbolic only. In fact, union leaders have spoken out against these kinds of ‘solutions’, arguing that something more sustainable is needed. While employers want to be seen to be doing ‘something’ and have considered one-off bonuses as a way of doing this, this risks setting an expectation – an “I had it last year so should get it this year too” mentality.  

From a legal point of view, a one-off bonus payment should not ordinarily give rise to any future entitlement to bonus payments, so long as it is completely discretionary. If, however, there is (or there becomes) a history or pattern of making such payments, the element of discretion may be lost.

To prevent any suggestion that such bonuses are anything other than a one-time payment to help with the current economic climate, there should be no expectation from the employee to receive it, or even an expectation as to how it should be calculated if it is to be paid. This can be a complex area, so it’s best to seek advice if you’re likely to make such payments more regularly, even if only annually, to ensure no obligation to pay is created.

3. Hardship loans

Employers can loan employees up to £10,000 each year with no tax consequences. Essentially, the company pays the employee a set amount on a one-on-one basis with the agreement that they pay it back over a defined period.

If you’re considering offering hardship loans, it’s advisable to ask the employee to sign a loan agreement before making any payment to them, setting out the terms of the repayment, including:

  • When it needs to be repaid;
  • Authorisations for deductions from salary for repayments;
  • How they will pay any outstanding amount if the employees leaves the company; and
  • Sanctions if the loan isn’t repaid.

This will also enable you to take formal action in the event that the employee fails to make repayments. It’s therefore important to have this paperwork in place – especially if large sums are being loaned.

All of this aside, the main question is whether hardship loans are a good idea. Loaning money to employees won’t necessarily solve the problem and could lead an employee into further debt. Furthermore, companies rarely do a ‘credit check’ when lending money. What if the employee has no means of paying it back? Disciplinary action? Employers are not banks.

Additionally, some companies are paying hardship loans with no expectation that employees pay it back. This main issue here is equality and ensuring fairness is applied in the process of awarding loans and in awarding the right amount. How can an employer judge the ‘need’ of one employee compared with another? This is incredibly subjective and plays right into the hands of discrimination claims.

Other considerations and issues to be alert to


Consider the optics

If you’re not in a position to consider financial bonuses, you may look to provide food or other items to help staff who are struggling. Indeed, a growing number of businesses have started providing free meals at work as part their employee benefits package. One BT call centre has even set up a “community pantry” where staff can donate and pick up essentials such as dried pasta, cereal and baby food.

While some will appreciate these sorts of perks, it’s important to be mindful that many will be uncomfortable with the idea. Though it insisted that its “community pantry” should not be confused with a food bank, BT was criticised for “normalising in work-poverty”, with some branding the initiative “shameful”. Moreover, those who are facing financial hardship will likely not want their colleagues to know that they are struggling and may feel embarrassed to utilise such initiatives in an open office. All of this could lead to grievances and possible reputational damage, as well as call into question whether staff are being fairly paid.

The best and simplest way to avoid well-intentioned initiatives backfiring is to ask your employees. You could consider setting up a ‘financial support group’ made up of employees reps. That way, the initiative isn’t being done to them, it’s being done by them and with their input. Avoid making assumptions – do a short pulse survey that asks employees to pick from a range of offerings (list them) and then implement the one which is in highest demand. You can’t please everyone all of the time, but you can at least demonstrate that you asked, listened and acted on the results.


Beware of discrimination

As with any company benefits scheme, it’s important to consider if cost of living incentives may give rise to any issues such as complaints of discrimination. For example, John Lewis’ free meal scheme is, on the face of it, a great perk for staff. However, depending on the food on offer, not all employees may be able to benefit. If the John Lewis canteen menu doesn’t cater for Kosha or Halal diets, it may exclude some from that perk. Additionally, those who celebrate Ramadan will be unlikely to benefit from this perk during that time because the canteen will be closed when they are able to eat.

Benefits that are also only provided to certain roles could also give rise to complaints of discrimination unless there is an objective justification for it. Several banks are awarding staff a pay rise or a one-off payment to assist with the cost of living; however, most are limiting which employees get the additional financial help by applying a salary banding for who gets the additional payments, such as staff earning less than £50,000.

In this instance, there is unlikely to be a risk of discrimination. However, if you were to only award assistance to staff who had not been absent from work, for example, you could run the risk of those who have been absent due to disabilities, childcare issues or maternity leave claiming this is discriminatory, as had it not been for those absences, they would have qualified for the extra pay. It’s therefore important to consider any criteria carefully.


Be realistic

Finally, while you may feel obliged to offer lavish rewards, you should be realistic about what’s viable for your business.

The answer may not be in actually providing the solution and more so in the signposting of help and guidance which allows employees to find their own solutions. This might be in the form of information sessions covering things like budgeting, financial planning, managing savings, and utilising incentive schemes such as a share scheme. There’s more that can be done with money to make it go further but many of us don’t know that because we haven’t ever seen a financial advisor.

Could you maximise existing incentive and commission schemes? Do you pay for introductions for new hires? Do you pay for cross-referrals or business leads which turn into revenue? Do you allow employees to sell some annual leave to gain some extra cash? Could employees cash in on a share save scheme they may have forgotten about? Can they buy discounted goods from your company? All of these are simple solutions that not only put money in people’s pockets without great cost to employers but may have financial and other benefits for businesses, too.

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Support through the cost of living crisis

As living costs continue to rise to unprecedented levels, employers must recognise the impact on their workforce and consider what they can do to alleviate concerns, otherwise issues relating to performance and absence could follow. 

Working alongside qualified Employment Law Advisers and HR Consultants, WorkNest can help you to:

  • Train your people managers to have more open conversations so that issues relating to mental health or financial wellbeing are identified early on, and advise on the best interventions to support employees
  • Manage complex, sensitive situations involving mental health fairly and compliantly, including support with Occupational Health referrals, advising on which adjustments are reasonable for the business and returns to work
  • Introduce employee incentives, such as benefit schemes and one-off bonus payments, including any necessary contractual terms and conditions
  • Draft employee correspondence and policies, saving you time and ensuring these documents are robust and watertight

For advice and support, call our team on 0345 226 8393 or request your free consultation using the button below.

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