Bonus Clause in UK Contracts: What It Means & Example Wording

When to Include a Bonus Clause

• In employment contracts where performance-related pay is part of the compensation package
• When recruiting senior employees who expect a bonus as a material part of their total remuneration
• When the employer wants to incentivise specific outcomes such as revenue targets, project completion, or customer satisfaction metrics

Example Wording

This example wording is illustrative only. Customise it to your specific circumstances and consider seeking legal advice.

Is a Bonus Clause Enforceable in the UK?

Bonus clauses are enforceable in the UK. However, the legal position depends on whether the bonus is contractual or discretionary. A contractual bonus (one the employee is entitled to if conditions are met) must be paid — failure to pay is a breach of contract. A discretionary bonus gives the employer more flexibility, but the discretion must be exercised rationally and in good faith (Braganza v BP Shipping Ltd [2015] UKSC 17). An employer cannot exercise discretion in a perverse, irrational, or arbitrary way. Repeatedly paying a bonus over many years may also create a contractual entitlement through custom and practice.

Common Mistakes

• Using language that accidentally creates a contractual entitlement — phrases like 'you will receive a bonus' imply a right, whereas 'you may be eligible for a discretionary bonus' preserves discretion
• Failing to specify that the employee must be employed and not under notice on the payment date — without this, a leaver may claim a pro-rata bonus
• Not documenting the criteria and rationale for bonus decisions — if discretion is challenged, the employer needs to show the decision was rational and made in good faith