Guide to drafting bonus clauses
TIPS ON DRAFTING BONUS CLAUSES IN EMPLOYMENT CONTRACTS
State the bonus terms clearly
Make sure you are clear on whether the bonus scheme is contractual, discretionary or a mixture of two.
Your bonus provisions must expressly specify any restrictions you wish to impose in terms of eligibility for payment of a bonus.
If you do not wish bonuses to be payable where an employee has left, has resigned or is working his/her notice then this must be clearly and expressly stated. Consider inserting a clause stating it is agreed that any bonus due will only accrue annually at the end of the bonus year and not a monthly basis.
The Courts have made it clear that they will not imply in such terms where they are not expressly stated in the employment contract.
Communicate the bonus terms
The employment contract should include a reference to any applicable bonus scheme. You can have a bonus scheme which sits separately from the employment contract but care needs to be taken around this is stated to interfaces with the employment contract and also the contractual status of such a document.
Secondly, you should advise your business against making any statement to staff potentially in line for a bonus about the possible value of any bonus pool for distribution in advance of formal bonus awards as the Courts have indicated that such a statement can be used as evidence where the business later decides not to pay a bonus.
Describing a bonus scheme as discretion is not enough – that discretion also needs to be exercised fairly. If discretion is not exercised fairly entitlement to a bonus has successfully been challenged on that basis.
If you need advice or have any questions in relation to drafting bonus clauses or schemes or in defending demands for a bonus payment, please contact David Greenhalgh on 020 3603 2177.
This article/blog is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.