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Bonuses and commissions are a great way to encourage employees to improve their performance. However, employers should avoid getting into situations where they contractually owe bonuses or commissions that they are not able to pay. In this article, we look at some key factors that you should consider when implementing a bonus or commission structure on top of your employees’ salaries. 

1. Implement Clear Employment Agreements

You should state in the employment agreement that any bonuses or commissions are discretionary and do not form part of the employment agreement. This means that bonuses are not a guarantee or contractual term, but may be given by you if you see fit. 

For example, if you have had a very profitable year, you may want to pay your employees a one-off bonus without this being in the employment agreement.

2. Have Formal Policies on Bonuses and Commissions

Why Use Policies?

Instead of putting details in the employment agreement, set up formal policies on bonuses and commissions. This is useful because:

  • detailing your bonus or commission structure in a policy gives you greater flexibility to alter it, based on your business’ needs. If this information was in an employment agreement, you would need to amend each affected agreement. This is not only an administrative hassle, but can be much harder to negotiate with employees; and
  • you can easily refer to the policy for clear terms of your bonus or commission structure. In the event of a dispute, you have the ability to amend the policy more easily than amending a contractual term (which requires the employee’s agreement).

You may be thinking of making bonuses dependent on an employee exceeding their key performance indicators (KPIs). You can still include a job description and related list of KPIs in the employee’s employment agreement, but keep the details of the bonus structure separate.

What Should the Policies Include?

When drafting your bonus policy or commission scheme, make sure you include terms on:

  • who the policy covers;
  • who is eligible and the criteria for eligibility;
  • how the bonus or commission structure is calculated;
  • how and when the commission and bonuses are paid; and
  • what happens when employment ends.

You should also explain the general terms and conditions of how you will govern the commission and bonus policy. For example, you may state that you:

  • have the power to amend or replace the policy at any time you see fit; or
  • may decide to not pay bonuses or commissions (e.g. if the company is not performing well).

3. Consider Employee Terminations

When an employee is terminated, disputes can often arise about unpaid commissions and bonuses. To avoid this, make sure your employment agreement and policy documents are clear on what happens in these circumstances.

For example, you can set out a ‘cut-off’ clause in your policy document, which states that you will not pay commissions if:

  • the payment cycle occurs after employment has terminated; or
  • termination is due to serious misconduct.  

Usually, where the bonus or commission is an additional payment to the salary, it will not be included in your calculation of payment in lieu of notice or other entitlements (unless required under law or the relevant modern award).

Key Takeaways

Bonuses and commissions are a great way to incentivise employees to work to a high standard. However, you should be wary of including them as part of your contract of employment with the employee. 

When you give bonuses and commissions on top of an employee’s salary, include this arrangement in a policy document. This policy should be separate to the employment agreement. If you need assistance implementing a bonus or commission structure, get in touch with LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

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