Bonus Clauses in Employment Contracts

Bonus clauses determine whether employees are entitled to additional payments beyond their base salary.

Types of Bonus

Contractual Bonus

A binding obligation to pay if conditions are met:

"Subject to meeting performance targets, you will receive an annual bonus of 10% of base salary, paid in March following the performance year."

Key features:

• Clear criteria for payment
• Specified amount or formula
• Enforceable as breach of contract if not paid

Discretionary Bonus

Employer has choice whether to pay:

"The Company may, at its absolute discretion, pay a bonus. Any bonus paid in one year does not create an entitlement in future years."

Key features:

• No obligation to pay
• No guaranteed amount
• Employer decides annually

Performance-Related Bonus

Based on individual or company performance:

"Subject to achieving your individual performance objectives and the Company meeting its financial targets, you may be eligible for a bonus of up to 20% of base salary."

Key features:

• Links pay to performance
• May be partly discretionary
• Often tiered by achievement level

Drafting Bonus Clauses

Clear Discretionary Clause

To maintain genuine discretion:

"The Company operates a discretionary bonus scheme. Any bonus paid shall be:

• At the Company's absolute discretion
• Non-contractual and ex gratia
• Not a precedent for future years
• Subject to terms determined by the Company annually"

Contractual Bonus Clause

If the bonus is intended to be a contractual right:

"You will be eligible for an annual performance bonus calculated as follows:

• Target bonus: 15% of base salary
• Payable if Company EBITDA exceeds £X
• Pro-rated for partial year employment
• Paid within 60 days of financial year-end"

Good Leaver vs Bad Leaver

Many bonus schemes distinguish between types of departure:

Good Leaver

Usually includes:

• Redundancy
• Retirement
• Death
• Ill-health
• Company-initiated termination without cause

Treatment: May receive pro-rated bonus

Bad Leaver

Usually includes:

• Resignation
• Dismissal for gross misconduct
• Breach of contract

Treatment: Forfeit bonus entitlement

Clause Example

"If you are a Good Leaver, you will receive a pro-rated bonus based on completed months. If you are a Bad Leaver, any bonus will be forfeited entirely."

Clawback Provisions

Employers may require repayment of bonuses in certain circumstances:

"If within 12 months of receiving a bonus you:

• Resign voluntarily
• Are dismissed for gross misconduct
• Breach post-termination restrictions

You agree to repay the bonus on a pro-rated basis."

Employment On Payment Date

Common requirement that causes disputes:

"To be eligible for a bonus, you must be employed and not under notice on the payment date."

Legal Position

• Courts have sometimes overruled such clauses as irrational
• Particularly where employee was dismissed shortly before payment
• Check if clause operates fairly in practice

Discrimination Issues

Bonus schemes must not discriminate:

• Part-time workers entitled to pro-rata bonus
• Employees on maternity leave cannot be excluded
• Disabled employees may need adjustments to targets
• Consider impact on protected groups

Implied Terms

Even discretionary bonuses are subject to implied terms:

• Good faith: Cannot exercise discretion in bad faith
• Rationality: Decision must not be irrational
• Non-arbitrary: Cannot make capricious decisions

Example Cases

Courts have intervened where:

• Bonus withdrawn for personal dislike of employee
• High performer denied bonus without explanation
• Bonus refused despite meeting all targets

Practical Tips

For Employers

1. Decide if bonus should be contractual or discretionary
2. Use clear language to reflect intention
3. Document decisions on discretionary awards
4. Apply criteria consistently
5. Review schemes for discrimination risks

For Employees

1. Check if bonus is contractual or discretionary
2. Keep records of performance against targets
3. Note any representations made about bonus
4. Query any unexpected non-payment
5. Seek advice before accepting reduced payment