Bonus Policies - Time for a review
A new calendar year is often a good time to review and update your bonus scheme.
A bonus is, traditionally, a sum of money added to a person's wages as a reward for good performance. A bonus may be expressly provided for in a contract, calculated according to a stated formula, or it may be non-contractual and wholly discretionary, paid as and when the employer feels it is merited. In practice, however, these distinctions are less clear. It has become common for employers to bestow a contractual right on employees to participate in a discretionary scheme, with maximum discretion being reserved to the employer over whether a payment is made at all, the amount paid, or the timing and conditions of the payment.
Drafting pitfalls
Drafting a bonus scheme - things to consider:
- Set out the terms in writing, in a clear and concise way that cannot be open to ambiguity so both parties know what the entitlement is;
- Clarify what the employee can earn, during what period, when the amounts will be paid, what happens if the employee is in his/her notice when payment is due and clarify if the scheme is contractual – i.e. subject to targets, or if it is a discretionary scheme based on a number of factors which may be financial and/or employee specific;
- Remember that even if the employer says the scheme is discretionary, if it is subject to a formula and this formula is applied annually, custom and practice arguments may mean that the employee has an implied right to a bonus and the scheme is in fact implicitly contractual;
- Remember to reserve the right to amend the policy from time to time and clarify if any payments are also pensionable.
Posted on 01/01/2016 by Ortolan
