Would your employee bonus scheme stand up in court?

The rise of bonus schemes post-COVID

We’ve been working with several SME clients who want to keep their best-performing employees happy by offering an incentive to stay with them. With cash flow tight in 2021 as the Australian economy emerges from the pandemic, salary increases are simply not an option for many small businesses. Instead, SMEs are increasingly turning to bonus schemes to secure employees.

Employer discretion essential

Employers must retain discretion over which employees receive a bonus and why, otherwise employees can develop a sense of entitlement in which a bonus is expected for doing the job for which they were originally employed.

However, discretion has its limits. Australian courts have punished employers found to have acted capriciously, arbitrarily, or unreasonably in declining to award bonuses. 

Similarly, you need to avoid discrimination on the basis of gender, marital status or disability when establishing and implementing an employee incentive scheme.

Below are some practical guidelines for SMEs to consider when setting up a bonus scheme. As lawyers, we strongly recommend you seek advice before drawing up or signing any documents.

Tip #1: Keep the bonus outside the employment contract

The bonus agreement should be kept separate from the contract of employment. The terms and conditions of an employee bonus scheme should be set out on a separate document. The bonus agreement should make it clear that awarding a bonus is at the employer’s discretion and that it does not form part of the employment contract.

Get a lawyer to review the terms and conditions of the bonus scheme.

Tip #2: Write a policy with clear bonus eligibility criteria

You must write and communicate to employees a policy that sets out a clear process and objective criteria to assess eligibility for a bonus payment. 

If you’re basing the award of an employee bonus on performance criteria, for example, those performance benchmarks must not only be documented but also measurable. 

Typically the criteria for receiving a bonus should relate to desired outcomes for your business. They should focus on results that relate to key performance metrics — such as profit margin, productivity, meeting or exceeding sales targets.

Tip #3: Make sure your policy is free of discrimination

Most importantly, your policy must be free of discrimination. The bonus scheme must not tie eligibility for the bonus to the sexual orientation, gender, race, or age of employees. 

Example 1

If one employee receives a bonus but another employee who does a similar job but is several years older does not receive a bonus, then the employer could be vulnerable to a claim of discrimination.

Example 2

If a bonus is tied to physical attendance at a weekly meeting held on Mondays at 7.30am, an employee who has primary carer responsibility for a child could potentially bring a claim for discrimination against the employer.

Tip #4: Have a paper trail if you decide not to award a bonus

If you have maintained the employer’s discretion to withhold a bonus payment, you may do so. In that case the employer will need to have a paper trail of evidence supporting the reasons for that decision, as well as a set of objective eligibility criteria that has been communicated to employees.

Tip #5: Communicate with your employees

Employees should know how their performance will be evaluated, and receive constructive feedback on how to improve or achieve their key performance indicators (KPIs).

The best way to minimise the risk of a disgruntled employee when bonus time comes around is to provide ongoing performance feedback during the year.

Bonus tip: Check your terms and conditions with a lawyer

No surprise that as lawyers we strongly recommend you have a lawyer review your proposed employee bonus scheme before you introduce it to your employees. But we believe it’s best for SMEs to gain the benefits of retaining your best performers while minimising the risk of a future claim of discrimination or breach of contract.

 

Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

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