Contract clause – Bonus

What is a bonus clause and when should you use it?

Use this template if you want to allow for a bonus in a contract of employment.

The details of any bonus schemes should be specified in the terms of the employment contract.

Bonuses are either guaranteed under contract, discretionary or some combination of the two.

This template provides the necessary clauses you should use for either a guaranteed bonus or a discretionary bonus.

In most bonus schemes, employers allow themselves the discretion to decide who would be eligible for a bonus, the amount payable and whether to pay any bonuses at all in a particular year.

It is an implied term of any bonus scheme that an employer’s discretion is not exercised in a way which is irrational or perverse.

If as an employer, you have a contractual bonus scheme (i.e. one guaranteed under contract) then any changes made to the bonus scheme would need to be made through a formal procedure involving employee consultation and agreement.

If you have a discretionary bonus scheme, it is more likely you can change the scheme without consulting employees because you have made the employees aware that the way the scheme is run is fully at your discretion.

To label a scheme discretionary, and then ensure that it is discretionary in practice, informs your employees that the provisions may not be provided in the same way, or at all, throughout their employment.

If there was cause for amending the scheme, you would simply exercise this discretion and then inform employees of the change.

However, changes to contractual schemes require agreement between employer and employee.

To introduce a change to a contractual bonus scheme, it is essential that you convey to employees your intentions in advance of taking any action.

Undertake consultation with your employees, which includes informing them all of the intended changes and making sure they can discuss any particular concerns with you.

Find out more about varying a contract of employment