Premiums, Bonuses and KPIs

When Does "Goodwill" Become a Legal Entitlement? The Trap of Guaranteed vs. Non-Guaranteed Wages

The first is the non-guaranteed wage component. As the name suggests, an employee does not have an automatic legal entitlement to its payment, even after meeting targets. Granting it depends entirely on the employer's final discretion. This typically includes annual bonuses or extraordinary rewards where you want to maintain flexibility.

The second is the guaranteed wage component. Once an employee meets predefined and precise conditions (e.g., a clear mathematical formula in a bonus policy), the employer has a statutory obligation to pay this component. The employee can successfully claim it in court.

How a Non-Guaranteed Bonus Becomes Guaranteed (Even Against Your Will)

This is where companies most often make mistakes. There are three main traps that can turn your "voluntary" bonus into an enforceable debt:

1. Overly precise criteria: If your internal regulation defines a bonus as a purely mathematical calculation (e.g., "meeting KPIs at 100% = a bonus of CZK 20,000") and does not include a clause about the employer's final constitutive decision, a court will classify it as a guaranteed component.

2. A manager's decision: Even a fully non-guaranteed bonus becomes guaranteed the moment a supervisor demonstrably informs the employee that the bonus has been granted. From that point on, it is a binding commitment.

3. Repeated payments (established practice): If you pay a bonus "automatically" every year in the same amount without a clear link to performance, it can be argued that it has become an established practice and a tacit part of the salary.

The foundation of your protection is precise wording. Your Internal Wage Regulation or Bonus Policy must clearly specify which components are guaranteed and which are non-guaranteed, and for the non-guaranteed ones, it must be explicitly stated that there is no legal entitlement to them.

Our Prague-based lawyers at ARROWS prepare wage regulations and employment contracts daily. We will ensure your bonuses remain genuinely non-guaranteed, allowing you to maintain flexibility. Need your documents reviewed? Write to us at consultation@arws.cz.

What Exactly Will the SÚIP Focus on During an Inspection of Your Remuneration System?

The State Labour Inspection Office (SÚIP) has made remuneration one of its main inspection priorities for 2025. Inspectors are no longer just looking for errors on payslips or missing guaranteed wages.

Inspections are specifically focused on equal pay for men and women and any form of hidden discrimination in bonus systems. In 2024, fines for "common" errors in employment relationships, which include remuneration, exceeded CZK 45 million.

Red Flag #1: The "Attendance Bonus"

This is a popular but extremely risky "Czech phenomenon" that the SÚIP actively seeks out and fines. Companies try to use it to address high absenteeism, but it is almost legally indefensible.

The problem? Such a bonus is almost always assessed as indirect discrimination. It penalises employees for exercising their statutory rights: being on temporary sick leave, caring for a family member (OČR), or attending a doctor's appointment based on a statutory obstacle to work. If your bonus system reduces a premium for any "absence," including statutory obstacles to work, you are exposing yourself to an almost certain fine.

Red Flag #2: Salary Confidentiality Clauses

The practice of employers prohibiting employees from discussing their salary amounts was common until recently. Today, however, it is explicitly forbidden. The reason is that these clauses prevent the detection of unequal pay and create a non-transparent environment.

Inspectors will look for these clauses not only in employment contracts but also in internal regulations or codes of conduct. Our Prague-based lawyers at ARROWS will conduct a comprehensive audit of your HR documentation and eliminate these hidden risks. For an immediate solution to your situation, write to us at consultation@arws.cz.

SÚIP Inspections and Employment Law Disputes

The following table summarises the most common risks our clients face in the area of remuneration and how ARROWS helps prevent them.

KPIs That Stand Up to Scrutiny: How to Face a Tax Audit and Motivate Management

The problem isn't just the SÚIP. Once you have a remuneration system that is too vague, the tax authority will sooner or later come knocking. While the SÚIP inspects labour law aspects (compliance with the Czech Labour Code, § 110), the tax authority inspects tax aspects.

The Tax Authority's main question is: "Is this bonus a tax-deductible expense?" To be so, it must be clearly linked to the achievement of taxable income.

Which KPIs Are Risky for the Tax Authority?

The biggest risk comes from subjective and unmeasurable criteria. Bonuses paid based on "satisfaction," "good work," or "contribution to the team" can easily be challenged by the tax administrator as expenses not related to generating profit, leading to an additional tax assessment.

A special chapter concerns bonuses for management and executives. Here, there is a high risk that if the bonus is not properly supported by a contract and linked to specific performance, it could be reclassified as a disguised distribution of profits. This would mean not only an additional assessment of income tax but also social security and health insurance contributions.

Your remuneration system must win two battles: be fair for the SÚIP and tax-deductible for the Tax Authority. This pressure often works in opposite directions: if a bonus is too discretionary, the Tax Authority will challenge it. If it is too clearly defined, it becomes a guaranteed wage component.

The lawyers and tax advisors at ARROWS have experience defending bonus systems for dozens of clients, including over 150 joint-stock companies. We will prepare expert training for your management and HR on how to correctly set and evaluate KPIs. We provide comprehensive legal opinions that will defend your remuneration system during a tax audit. Need tax and legal certainty? Write to consultation@arws.cz.

International Companies in the Czech Republic: The Trap of Adopting Global Bonus Policies

If you are the Czech branch of a multinational corporation, you face a specific risk: pressure to implement a global bonus policy that clashes with the reality of Czech law. Why can't a global "Bonus Policy" just be translated and used?

A global HR policy (often from the US or UK) is written in a different legal environment. The Czech Labour Code is much stricter and provides greater employee protection. Principles like "equal pay for equal work" (§ 110) or protection against discrimination (§ 16) always take precedence over any internal directive from your parent company (HQ).

A typical risk is that global policies do not distinguish between guaranteed and non-guaranteed wage components in the way Czech law does. Relying on a global policy in a Czech court is a recipe for failure. Similarly, special rules apply to the remuneration of posted workers, which must comply with Czech legislation.

Thanks to our decade of practice and the ARROWS International network, we handle employment law matters with an international element daily. Our lawyers know how to "translate" the requirements of your parent company (HQ) into the Czech legal framework. We will ensure that your local contracts are aligned with the global strategy while protecting the Czech branch from sanctions. For assistance with international cases, write to us at consultation@arws.cz.

Tax Audits and Court Disputes

The following table shows the risks associated with tax and court disputes, which are often more costly than the fine from the SÚIP itself.

Conclusion: ARROWS as Your Partner for Safe and Effective Remuneration

A correctly designed system of premiums, bonuses, and KPIs is not an expense but an investment. A poorly designed system is a ticking time bomb, waiting for an SÚIP inspection or the first dissatisfied employee.

The foundation of your protection is a meticulously drafted Internal Wage Regulation and Bonus Policy. These documents must be living, understandable, and legally watertight.

ARROWS provides you with comprehensive legal services – from preparing documentation that protects you from fines to expert training for your management and representation in courts and before administrative authorities. Our experience with over 150 joint-stock companies and 250 limited liability companies allows us to see risks that others overlook. At the same time, we are happy to listen to your business ideas. We often connect our clients when we see a mutual business opportunity.

Want to be sure that your remuneration system is 100% compliant and genuinely motivating? Connect with us at consultation@arws.cz and get a tailored legal solution.

Don't want to solve this problem on your own? Over 2,000 clients trust the ARROWS law firm, and we are honored as the Law Firm of the Year 2024. See our references HERE and it will be our honor to help you solve your problem. The initial inquiry is free of charge.