Employers often design and implement Employee Bonus Plans to motivate employees to work hard and achieve company-set goals, be it sales targets, high marks on customer satisfaction surveys, or any other system of measuring achievement. Employee Bonus Plans are also a tremendously effective way to improve worker morale. Often, employers retain employment attorneys to draft these bonus plans in order to maximize effectiveness and to ensure compliance with local, state, and federal employment laws. In order to accomplish those goals, attorneys should pay careful attention to the following provisions.

• Purpose / Objectives: The purpose or objectives of the employee bonus plan should be laid out at or near the top of the plan. It is important to let employees know that the bonus plan is designed to reward employees for their contributions to the successful achievements of corporate goals and to share the success of the business with employees.
• Administration: The Employee Bonus Plan should let the employee know who is administering the plan and who will be setting the performance objectives, be it the Chief Executive Officer, the Director of Human Resources, or a team of executives.
• Eligibility: This provision should let the employees know which categories of employees are covered. Is this a bonus plan for the rank-and-file workers or for executives? Is it only for full-time employees, or are temporary and part-time employees, interns, and independent contractors involved as well? This provision should clarify which employees are eligible for the incentives described in the bonus plan.
• Confidentiality: Employers may want to include a confidentiality clause in their bonus plan. If so, this provision should state that participation in the bonus plan and all related discussion and documentation should be considered fully confidential between the company and the employee. All employees should be expected to honor this agreement and promise not to discuss or disclose bonus plan matters with any persons other than his or her manger or human resources.

As far as the substance of the bonus plan, it is important for employers in California to be cognizant of state law. The following categories of incentive plans should be considered in compliance with California law:

• Bonus Plans Based on Gross Sales: Bonuses not reduced by any cost factor, e.g., based upon a gross sales goal or productivity in terms of units produced, hours worked, etc., should be acceptable because such bonuses are not affected by the costs of doing business, such as shrinkage or workers compensation costs.
• Bonus Plans Based on Certain Margins: Bonuses may be based on some portion of a company’s profits, excluding impermissible expenses discussed above. Thus, for example, a bonus based on a gross margin or contribution margin will be acceptable.
• Profit Sharing Plans: ERISA authorizes employers to implement profit sharing plans, and generally does not restrict how profits are calculated, except that amounts accrued must be determined under a definite ERISA-compliant pre-determined formula.
• Discretionary Bonuses: Truly discretionary bonuses are legal, but a bonus is discretionary only if: (1) the fact and the amount of the payment are determined in the sole discretion of management; and (2) the payments are not pursuant to any contract, agreement, or promise causing the employee to expect such payments regularly. However, note that a “discretionary” bonus regularly paid each year, e.g., a holiday bonus, may lose its discretionary character after some period of time if employees come to expect such payments.

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