Discretionary vs Non-Discretionary Payments: Australian Employer’s Guide

Paying your team correctly isn’t just about getting wages out on time. In Australia, the way you classify bonuses, commissions and other extras can change your obligations around superannuation, Fair Work compliance and final pays.

The tricky part? Not all payments are treated the same under the law. Some are discretionary (you choose whether to pay them), while others are non-discretionary (an entitlement set by contract, policy, Award or law).

In this guide, we’ll explain what those terms mean in practical, plain-English terms, where the biggest compliance risks usually sit, and how to document your arrangements so you can reward performance without confusion or disputes.

Important note: this article provides general legal information. Superannuation and payroll tax are primarily tax matters. We don’t provide tax advice-please speak with your accountant for advice about superannuation, PAYG and payroll tax on your specific payment structures.

What Do “Discretionary” And “Non‑Discretionary” Payments Mean?

When you pay employees in Australia, most payments fall into one of two buckets. The label you use in your business is less important than the substance of how the payment operates in practice.

Discretionary payments

A discretionary payment is one you may choose to pay, but you’re not obliged to. There’s no promise in a contract, policy, Award or enterprise agreement that creates an expectation or entitlement to receive it.

• Unannounced “thank you” bonuses after a big quarter
• One-off gifts or ad hoc rewards
• Employer-decided spot payments that aren’t tied to set criteria

The key test: could you decide not to pay it without breaching an agreement or policy? If yes, it’s likely discretionary.

Non-discretionary payments

Non-discretionary payments are entitlements. If set criteria are satisfied, the payment must be made because the obligation comes from an employee’s contract, your bonus plan or commission scheme, a modern Award or enterprise agreement, or legislation.

• Base salary and ordinary hourly wages
• Commission guaranteed under a sales plan
• Bonuses promised in a written scheme (e.g. “$2,000 if X target is met”)
• Allowances, penalty rates and loadings required by an applicable Award or agreement
• Annual leave loading where an Award or contract provides it

If an employee would reasonably expect to receive the payment (because it’s part of their remuneration framework or you’ve consistently promised it), it’s non‑discretionary-even if performance-based.

Why Does The Distinction Matter In Australia?

Correct classification helps you comply with employment law and tax obligations, avoid backpay and keep payroll running smoothly. Here are the main areas impacted.

Superannuation on ordinary time earnings (OTE)

Superannuation is generally calculated on an employee’s ordinary time earnings (OTE). Many non‑discretionary payments-like commissions and guaranteed bonuses-are included in OTE. Genuinely discretionary bonuses are typically not OTE.

Because this is a tax issue, treatment can be nuanced. Two common risks we see are:

• Paying a “bonus” that is actually guaranteed under a written scheme (making it non‑discretionary and likely part of OTE), but not paying super on it
• Assuming all bonuses are discretionary, which they often are not in practice

For a legal overview of how OTE works in employment contexts, it can help to review guidance about ordinary time earnings and how they interact with typical pay components. For specific super calculations on your payroll, please speak with your accountant or payroll adviser.

Payroll tax and PAYG withholding

PAYG withholding generally applies to salary and wages, including most bonuses. Payroll tax is a state-based tax and the rules vary across jurisdictions. Many states and territories include bonuses in taxable wages regardless of whether they’re discretionary or not. In other words, payroll tax treatment does not hinge solely on whether a payment is “discretionary”.

Because this is a tax compliance area, check your state revenue guidance and get accounting advice on how bonuses and commissions are treated for payroll tax in your state.

Fair Work, Awards and enterprise agreements

The National Employment Standards (NES) set minimum entitlements like leave and notice. Modern Awards and enterprise agreements add industry- or workplace-specific terms (for example, allowances, penalty rates or leave loading). These instruments don’t use a universal discretionary/non‑discretionary framework, but in practice the distinction matters because:

• Payments that are mandated by an Award or agreement are non‑discretionary entitlements
• Certain calculations (e.g. some termination and leave components) are based on specified earnings and may exclude truly discretionary amounts

If an Award applies to your workforce, ensure your bonus or commission plans align with Award requirements. Where you’re unsure how a specific Award interacts with incentives, consider tailored award compliance support.

How Can You Tell Which Category A Payment Falls Into?

Labels don’t decide the outcome-substance does. Ask yourself the following and document your answers.

Key questions to test your payment

• Is the payment mentioned in an Employment Contract, an incentive plan, a policy, an Award or an enterprise agreement?
• Is there a clear formula or criteria that, once met, obliges payment?
• Is the payment recurring (monthly/quarterly/annually) or genuinely ad hoc?
• Can you decide not to pay it without breaching a written obligation or established practice?
• Have you created a reasonable expectation (e.g. communicated “everyone who hits target gets X”)?

Two examples to draw the line:

• Non‑discretionary: “All sales reps who meet 120% of target receive a $1,500 bonus, paid in the next pay cycle” set out in a written plan
• Discretionary: A CEO decides after year‑end to give a surprise $300 gift card to the team with no prior promise

Common grey areas

Commissions vs “bonuses”. Sales commissions are typically non‑discretionary if tied to a written scheme. If you pay performance-related amounts, consider a clear commission agreement so everyone knows how, when and on what basis commissions are paid.

“Discretionary” language inside a formula. If your policy says “discretionary” but also includes a fixed formula that triggers payment when criteria are met, the payment will usually be treated as non‑discretionary in practice.

Consistent past practice. Paying a “one‑off” bonus every December for years, without stating it’s discretionary, can create an expectation that looks non‑discretionary. Clear wording and consistent communication matter.

How To Manage Payments And Stay Compliant

Good documentation and clear processes reduce risk and help you reward staff fairly. Here’s a practical approach.

1) Lock down your employment contracts and plans

Spell out the non‑discretionary elements of pay in writing. This usually includes base salary/hourly rate and any guaranteed allowances or regular incentive structures. Use tailored Employment Contracts so entitlements are crystal clear.

For discretionary payments, avoid promising language. If you want the flexibility to offer ad hoc bonuses, set expectations with wording such as “from time to time, and at the employer’s sole discretion, additional rewards may be provided.”

Where you use structured incentives, have a standalone plan or policy that sets out eligibility, calculation, timing, pro‑rata rules, clawbacks and what happens on resignation or termination. If you’re in a sales environment, consider a written commission agreement for consistency.

2) Communicate clearly and consistently

Tell employees what’s guaranteed and what isn’t. Provide copies of incentive plans and policies upon commencement and when you update them. Consistency in messaging prevents disputes later.

Housing rules in a concise workplace policy or staff handbook can also help staff understand how your business approaches bonuses, commissions and rewards.

3) Configure payroll to separate payment types

Use payroll codes that distinguish base pay, allowances, commissions, guaranteed bonuses and ad hoc discretionary bonuses. Record the reason for each discretionary payment (e.g. “one‑off recognition bonus; not part of ongoing remuneration”).

This makes super calculations easier, supports PAYG reporting and helps you evidence decisions if questions arise.

4) Apply superannuation rules carefully

Most non‑discretionary bonuses and commissions will form part of OTE for super purposes; genuinely discretionary bonuses usually won’t. A good legal primer on the concept is our guide to ordinary time earnings, and you can also review practical issues specific to superannuation on bonuses.

Because this is a tax calculation, get a professional accounting view on your scheme before launch (and again if you change it).

5) Check Award and enterprise agreement interactions

If a modern Award or enterprise agreement applies, check for clauses about allowances, loadings, penalty rates, minimum engagement, leave loading and incentive structures. A payment created by an Award or agreement is a non‑discretionary entitlement. If unsure, seek specific award compliance advice.

6) Review annually

As your team grows, revisit your contracts, incentive plans and payroll configuration. A quick annual review can catch unintended entitlements or gaps. Many businesses book a targeted legal health check to keep things tidy as they scale.

Which Documents Should You Have In Place?

You don’t need a stack of paperwork, but the right core documents will prevent misunderstandings and reduce risk.

• Employment Contract: Sets out base pay, hours, allowances, overtime rules and how incentives work (or confirms that ad hoc bonuses are at your discretion). Use a tailored Employment Contract rather than a one‑size‑fits‑all template.
• Bonus or Incentive Plan: Explains eligibility, performance criteria, calculation, timing, treatment on leave and what happens on resignation or termination.
• Commission Agreement: For sales roles, a written commission agreement clarifies when commissions are earned, payable and whether chargebacks apply.
• Workplace Policy or Staff Handbook: A short, accessible summary of how your business handles rewards, recognition and conduct can sit within a broader workplace policy suite.
• Payroll & Record-Keeping Procedure: Internal process notes to ensure payroll coding, super calculations and approvals are handled consistently.

If an Award or enterprise agreement applies, keep a copy handy and cross‑check that your plans don’t contradict those obligations.

What about superannuation language in your documents?

It’s useful to specify whether super is payable on particular elements-particularly bonuses and commissions-but remember, super treatment ultimately follows the law. If your document says “no super”, that won’t override legal OTE rules. For practical guidance on bonuses, see our note on superannuation on bonuses and check in with your accountant.

Final pay, notice and termination

Termination entitlements are calculated under the NES, any applicable Award/enterprise agreement and the contract. Make sure your documents explain whether incentive amounts are pro‑rated on termination, any qualifying dates, and how notice impacts eligibility. For complex exits, it’s worth reviewing your final pay calculations against the specific terms that apply to that employee.

Common Mistakes To Avoid

• Calling something “discretionary” when it isn’t. If there’s a formula and employees meet the criteria, the payment is usually non‑discretionary-even if you label it otherwise.
• Promising a “discretionary” bonus in a contract. Language like “will receive a discretionary bonus of $X if targets are met” can create an enforceable entitlement. Keep truly discretionary rewards out of contracts.
• Underpaying super on non‑discretionary incentives. Guaranteed bonuses and commissions often form part of OTE. Get accounting advice before launch.
• Ignoring Award interactions. Where Awards apply, allowances, loadings and overtime rules are non‑discretionary entitlements. Align your plans with those minimums.
• Building expectations through custom and practice. Repeating “one‑off” payments the same way each year can create an assumed entitlement. Use clear communication and vary amounts/timing if you want to preserve discretion.

Quick answers to FAQs

Are all bonuses discretionary? No. A bonus is discretionary only if you can decide whether to pay it without breaching a contract, policy, Award or agreement and without contradicting an established expectation.

Do I need to pay super on all bonuses? Not always. Guaranteed bonuses and commissions often attract super because they’re part of OTE. A genuinely discretionary, ad hoc bonus typically does not. This is a tax matter-confirm treatment with your accountant.

Can I change a non‑discretionary bonus to discretionary? You usually can’t remove contractual or Award-based entitlements unilaterally. If you want to change your scheme, consult with staff and update documents appropriately.

Key Takeaways

• Discretionary payments are voluntary; non‑discretionary payments are entitlements created by a contract, policy, Award, enterprise agreement or law.
• Classification affects superannuation (OTE), Award/enterprise agreement compliance, PAYG and payroll processes; payroll tax treatment often includes bonuses regardless of “discretion.”
• Write clear Employment Contracts and separate incentive plans so you can reward performance without creating unintended entitlements.
• Use written schemes for commissions and bonuses, code payment types correctly in payroll, and align arrangements with any applicable Award or agreement.
• Super on bonuses and commissions turns on OTE rules and is a tax question-check your approach with an accountant and review practical issues around superannuation on bonuses.
• Review your documents annually and consider a quick legal health check as your team and incentive structures evolve.

If you’d like a consultation on setting up bonus and commission structures for your team, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.