It is not uncommon for employment contracts to include provisions that entitle employees to participate in an incentive scheme, and that any payments made under the scheme will be subject to the employer’s absolute and sole discretion.
However, recent decisions of the Federal Court of Australia have shone a light on the complicated territory of including the terms and conditions of an employee incentive or profit share scheme in an employment contract, and whether such payments can really be discretionary.
In this Insight we will examine these decisions and the key lessons for employers.
HealthX Group Pty Ltd v the Palling (No 2) [2025] FCA 1300
In this case, the Federal Court considered whether a profit share arrangement was an entitlement or discretionary.
The relevant employment contract included in a schedule to the contract (our emphasis added): “Profit Share: All General Managers will participate in a profit share arrangement… The General Manager HealthX will access a profit share in the amount of 5% of the gross contribution…” “Access” to the profit share was dependent upon four performance “gates” being met by the business.
In this case, HealthX contended that this wording did no more than to confer on it a discretion to pay a “bonus” which was enlivened upon the gates being met.
However, the Court rejected this and held that nothing in the contract connoted any discretion on the part of HealthX as to whether or not the profit share would be paid and that to the contrary, the wording was clear (and a reasonable businessperson would understand the same), that the employee will access (ie. obtain) 5% of the gross contribution once each of the gates had been met.
The Court held: “if an arrangement has been reached between an employer and an employee to share in the profits of the business, and that arrangement finds form in the contract of employment itself, there will be an expectation on the part of the employee that, should the business make a profit, the employee will be contractually entitled to the specified share.”
Wollermann v Fortrend Securities Pty Ltd [2025] FCA 103
This case concerned two employees who were entitled to monthly cash bonuses based on commissions earned each month.
Importantly, the relevant employment contracts included that the employees (our emphasis added): “would receive a bonus in the event of Fortrend receiving more than USD50,000 per month in commissions through the client and accounts allocated to you” and “the bonus for a particular month will be paid in the following manner: 50% on the fifteenth day of the following month and 50% after a period of seven months”.
However, if the employees resigned or their employment was terminated, they would not be entitled to receive any unpaid bonus.
The employees in this case resigned from their employment, and Fortrend adopted the position that they had forfeited 50% of their bonuses as a result.
The employees subsequently claimed that Fortrend had breached section 323 of the Fair Work Act 2009 (Cth) (“Act”) by deferring the bonus payment and forfeiting the deferred bonus.
Section 323 of the Act provides that an employer must pay an employee amounts payable (which includes incentive-based payments and bonuses) to the employee in relation to the performance of work:
in full;
in money; and
at least monthly.
Fortrend argued that the employees’ entitlement to 50% of the bonuses did not crystalise until after a period of seven months and were therefore not “payable” until that time.
However, the Court rejected this argument and held that the drafting of the contract meant that once the monthly commission threshold was surpassed, the bonuses became due and payable for the purposes of section 323 of the Act. There was no discretion as to whether the amounts were payable.
The Court held that a contractual provision which purports to enable an employer to withhold payment of 50% of an employee’s entitlement for a period of seven months or forfeit an amount to which an employee is already entitled, is prohibited by section 323 of the Act and therefore invalid.
Key lessons for employers
Both of these cases highlight the critical importance of ensuring the wording used in expressing an entitlement to participate in an incentive or profit share scheme properly reflects the commercial intention.
Employers should keep the following top of mind:
Including the terms and conditions of an incentive scheme within the body of an employment contract not only limits an employer’s ability to vary the terms of the incentive scheme but can expose an employer to breach of contract and significant legal and financial risk. Employers should therefore carefully consider how incentive arrangements are structured and communicated to employees.
Employers should review the terms of any incentive schemes – and in particular, the use of words such as “will” (instead of “may”) – and consider whether as a result of such terminology, there is scope to treat the payment of an incentive as truly discretionary or not.
If the incentive arrangement seeks to provide for any deferral arrangements, ensure the drafting reflects that such amounts only become payable at the end of any deferral period.
Our Employment & Workplace Relations Team is here to offer you expert advice and support for any questions or issues you may have regarding your employment contracts and incentive arrangements. Please contact Emily Gray, Senior Associate or Cassie Burfoot, Director for further information.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.