Bonus Clauses Should Be Carefully Worded to Avoid Surprises

10 July 2008

A recent Ruling of the Supreme Court (Court of Social Affairs, on 4/11/2007) highlights a series of precautionary measures for employers that agree a bonus with their employees which depends on objectives.

  • Ambiguous wording of the bonus agreement only puts the employer at risk, never the employee.
  • If the right to a bonus is agreed for, or up to, a specific sum, with the condition of achieving certain objectives without including further details, should the company not fix these objectives, this can lead to the obligation of the company to pay the bonus to the employee.
  • If in the agreement the conditions to receive the bonus are fixed by the parties on an annual basis, and subsequently this does not happen due to reasons attributable to the company, then this can imply that the employee is owed the bonus. In these cases it will be assumed that the execution of this condition was not carried out due to the will of only one of the parties, the company, given that they are the only ones that can truly fix the objectives of the employee, as result of their managing position. Being prohibited by the Civil Code, it is understood that the agreement is not conditional and as a result the company would be obliged to pay the promised bonus.
  • For the Supreme Court, an employee, even in a management position, does not have the power of fixing or setting the objectives to fulfil.
  • We recommend that an initial condition of a prior agreement between the parties to obtain the bonus be eliminated, and that it is established clearly what the bonus-pending objectives will be and their nature, for example whether they are individual objectives for the employee or objectives for the company.
  • It is recommendable that the company succeeds in fixing these objectives subsequently.

For further information, please contact Ana Gómez Hernández: agomez@mmmm.es