Employment contract with a bonus scheme

Bonus disputes come from the gap between what the employer meant and what the contract says: a bonus described as discretionary that has been paid every year on the same basis, a condition that the employee be employed at the payment date that was never written down, a clawback with no consent, a holiday pay calculation that ignored the bonus. The contract and the scheme have to say what kind of bonus it is, what has to happen for it to be paid, what happens to an employee who leaves, how the discretion is exercised, and how the bonus interacts with holiday pay, family leave and equal pay. The contract is drafted for the employer as a reusable template for the grade, for a fixed fee of £595 and delivery in five working days.

Who this is for

Employers in England and Wales paying annual, quarterly, sales or performance bonuses to staff, and employers whose bonus schemes exist only in practice.

What matters in a bonus scheme

Contractual and discretionary bonuses and the difference in practice

A contractual bonus is a term: if the conditions are met, it is wages the employee can claim under section 13 of the Employment Rights Act 1996; a discretionary bonus gives the employer a choice whether to pay and how much, but the choice must be exercised in good faith and not irrationally, and a bonus paid every year on the same basis becomes contractual by custom; the contract should say which the scheme is, should make eligibility to be considered the contractual element and the amount the discretionary one where that is the intention, and should reserve the right to change the scheme for future years on notice.

The conditions, the targets and the measurement

The scheme should state the period, the targets (financial, personal, company), how they are set and by whom, how performance is measured and who decides, the maximum, the timing of payment, and the employer's right to adjust targets where the business changes, with the employee told the targets at the start of the period; a bonus with targets set after the event, or measured by numbers the employee cannot see, is the scheme the employee argues was never discretionary, and the contract should set the process.

The employee under notice or no longer employed at payment

The scheme should state that an employee must be employed and not under notice (given or received) on the payment date to receive a bonus, with the employer's discretion to pay a pro rata amount to good leavers, because without the term a bonus for a completed period may be payable to an employee who has left; the term should be applied consistently, and the contract should say what happens where the employer dismisses without notice or in breach, because a term that denies a bonus to an employee the employer wrongfully dismissed will not be upheld.

Discretion exercised rationally and the duty of trust

Where the amount is discretionary, the employer must exercise the discretion rationally and in good faith, consistently with how it has treated others, and not in a way that breaches the implied term of trust and confidence; the contract should state the factors the employer may take into account (company performance, individual performance, conduct, affordability), should provide for the decision to be communicated with reasons, and should say that nil is a possible outcome where the factors justify it; an employer that pays zero without explanation to one employee and full bonus to others has a claim to answer.

Clawback, malus and the written consent

Clawback (recovering a bonus already paid) and malus (reducing a bonus before payment) are lawful only if the contract provides for them and, for deductions from wages, the employee has consented in writing in advance under section 13 of the Employment Rights Act 1996; the contract should state the triggers (misstatement of results, misconduct discovered later, a breach of covenants), the period during which clawback applies, the amount recoverable, and the consent, with the employer recognising that recovery from a departed employee is a debt claim rather than a deduction.

Bonus, holiday pay, family leave and equality

A bonus that is regular enough to be normal remuneration must be reflected in holiday pay under the Working Time Regulations 1998 as amended, and the scheme should say how; an employee on maternity leave is entitled under the Equality Act 2010 to the bonus attributable to the period before leave and the compulsory maternity leave period, and the scheme should address family leave expressly; and bonus decisions are subject to equal pay and discrimination law, so the criteria should be objective and the decisions recorded; the written particulars under section 1 of the Employment Rights Act 1996 should refer to the scheme as part of the remuneration.

What it costs

Employment contract, £595. One template you can reuse for a grade of staff. Five working days.

Staff handbook and core policies, £995. Five working days.

Buying online forms the engagement on payment. The scope is what the employment contracts and handbooks page describes, you accept the Terms of Service at checkout, and I email you within four working hours to get started. If you would rather ask something first, email me.

What you get

• A bespoke contract drafted for how you employ people
• Restrictive covenants drafted at a scope a court will uphold
• Confidentiality and intellectual property provisions that put ownership where it belongs
• The statutory particulars, so the document does the job section 1 of the Employment Rights Act 1996 requires it to do
• Flexibility clauses where you genuinely need them, drafted to survive challenge
• Core policies: disciplinary, grievance, sickness absence, equal opportunities, data protection and, increasingly, AI use
• One round of amendments

What is not included

• Acting for employees
• Employment tribunal representation
• Payroll, pensions auto-enrolment and tax
• Immigration and sponsor licence work
• Day to day HR handling, disciplinaries, grievances and redundancy processes

Questions I am often asked

We call our bonus discretionary but have paid it every year. Is it still discretionary?

Possibly not, if it has been paid on the same basis for long enough to be a term by custom. The contract makes clear what is contractual (eligibility) and what is discretionary (amount), and how the discretion is exercised.

An employee resigned before the bonus was paid. Do we owe it?

Only if the scheme has no term requiring the employee to be employed and not under notice at the payment date. The contract includes that term, with discretion for good leavers.

Can we claw back a bonus if the results were wrong?

If the contract provides for it, the trigger is stated and the employee consented in writing in advance, yes. Without those, recovery from wages is an unlawful deduction.

Related guidance and services

• Employment contracts and handbooks, £595, the service this page describes
• Consultancy and contractor agreements, £595
• Settlement agreements for employers, £795
• Employment contract for a sales employee on commission
• Employment contract for a business development manager

This page is general guidance for businesses in England and Wales, not advice on your own circumstances. Last reviewed: October 2026. Email geoffrey@caesar.co.uk.