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When you employ staff in Australia, understanding how and when to pay wages is key for keeping your business compliant and building trust with your team. However, not all payments are created equal. The difference between discretionary and non-discretionary payments can affect everything from superannuation and tax to your obligations under the Fair Work Act.
Getting these details right matters not just for your peace of mind, but also for your employees’ entitlements – and for avoiding costly penalties. Many business owners are unsure about where the line is drawn or what practical steps are needed to comply with the law. If you’re asking, “What are discretionary vs non-discretionary payments, and how should I handle them as an employer in Australia?” – you’re in the right place.
Read on, and we’ll break down:
- What discretionary and non-discretionary payments really mean
- Why the distinction matters under Australian law
- How to manage these payments to stay compliant
- The documents and processes to put in place to protect your business
Let’s dive into the essentials every employer should know to get this right.
What Are Discretionary vs Non-Discretionary Payments?
When you pay your team, the law distinguishes between two main types of payments: discretionary and non-discretionary. The distinction affects everything from calculating super, to figuring out annual leave, redundancy, and commission entitlements.
What Is a Discretionary Payment?
A discretionary payment is made at your discretion as the employer. In plain language, this means it’s a payment you choose to give – it isn’t a guaranteed entitlement, and there’s no legal obligation for you to pay it, unless you decide to.
Common examples of discretionary payments include:
- Spot bonuses or “thank you” bonuses that aren’t promised up front
- Ad-hoc incentive payments
- One-off gifts or payments to staff
The key is that these are not outlined in the employee’s contract, employment policies, or required by an Award, enterprise agreement, or law. They are truly at your discretion.
What Is a Non-Discretionary Payment?
Non-discretionary payments, on the other hand, are payments your staff are entitled to, based on pre-determined terms – such as their contract, an Award or enterprise bargaining agreement, your business’s incentive scheme, or company policies.
Examples of non-discretionary payments include:
- Salaries and normal hourly wages
- Commission payments under a sales agreement
- Guaranteed bonuses promised in a contract or published bonus scheme
- Allowances and penalty rates mandated by an industrial Award or the Fair Work Act
- Annual leave loading if specified in the Award or contract
In short, if your employee would reasonably expect to receive the payment, or if it’s an agreed part of their remuneration package – even if it’s calculated based on performance – it is non-discretionary.
Why Does the Discretionary vs Non-Discretionary Distinction Matter?
It’s more than terminology – classifying payments correctly is essential for:
- Fair Work compliance
- Calculating leave entitlements
- Figuring out termination payouts and redundancy
- Applying superannuation correctly
- Managing payroll tax and PAYG withholding
Impact on Superannuation and Tax
Superannuation is calculated based on an employee’s ordinary time earnings (OTE), not all payments. Most non-discretionary payments (such as commissions and guaranteed bonuses) are included in OTE and must have super paid on them. However, genuinely discretionary bonuses are typically not counted as OTE and therefore don’t attract super.
Miscalculating super on the wrong type of payment can result in underpayments and possible penalties from the ATO. It’s a common trap for Australian small businesses – one best avoided with good advice and clear systems.
Payroll tax obligations also hinge on whether a bonus or allowance is discretionary or not, and the rules can vary state to state.
Awards, Enterprise Agreements, and Fair Work
The National Employment Standards (NES) and many modern awards distinguish between “guaranteed” payments (non-discretionary) and one-off amounts (discretionary). For example, annual leave loading applies to regular pay but not to true discretionary bonuses. Similarly, severance or redundancy pay calculations are based only on non-discretionary entitlements.
If you want to know more about award compliance, see our Modern Award Compliance Guide.
Getting discretionary vs non-discretionary payments wrong can lead to disputes, back-pay claims, and even breaches of work health and safety if morale is affected.
How Do I Distinguish Between Discretionary and Non-Discretionary Payments in Practice?
Sometimes, the distinction is simple. If your staff are legally entitled to a payment because of their contract or policy, it’s non-discretionary. If you voluntarily hand out a one-off reward with no expectation, it’s usually discretionary. But grey areas abound, especially with “bonuses” and “commissions.”
Questions to Ask
- Is the payment outlined in the Award, enterprise agreement, or contract?
- Do your staff expect the payment, or is it promised as part of their package?
- Is it recurring (e.g., monthly/quarterly/annual), or purely ad-hoc?
- Can you withhold it for any reason, or must you pay it if criteria are met?
If it’s promised, expected, or based on set criteria you can’t change, it’s probably non-discretionary.
If you can choose not to pay it without breaching a contract or policy, it’s likely discretionary.
For example, if you have a written incentive scheme stating, “All staff who meet targets receive a $2,000 bonus at year end,” that payment is non-discretionary – even if calculated on performance. However, if you simply decide to reward a team with an unexpected bonus after a productive quarter, that’s discretionary.
Managing Payments to Stay Compliant
Managing employee pay is more than just getting the numbers right – you need to ensure documentation, processes, and communication all line up. Here’s how to approach discretionary and non-discretionary payments in a way that protects your business (and your team’s trust).
Step 1: Get Your Employment Contracts and Policies in Order
Clear, well-drafted employment contracts should set out all the non-discretionary elements of pay, including:
- Base salary or hourly rate
- Any guaranteed allowances or regular bonuses
- Details of commission structures or performance-based pay
To ensure something remains discretionary, leave it out of the contract and any formal policy documentation. If you mention an annual bonus or incentive in policies, use wording like “at the sole discretion of the employer, may offer additional rewards from time to time.”
Don’t know where to start? We can help review or draft your employment agreements to ensure you’re covered.
Step 2: Document and Communicate Clearly
Transparency is key. Make sure your staff know what they can expect (non-discretionary) and what is not guaranteed (discretionary). This isn’t just good for compliance, it also builds team trust and prevents disputes if you ever need to withhold a payment.
Have written bonus schemes, commission plans, and incentive policies prepared, and provide copies to employees on commencement or when you issue updates.
Step 3: Track Payments and Payroll Records
Keep clear records detailing which payments are set (non-discretionary) and which are ad-hoc (discretionary). This is vital not only for tax and super calculations, but also for resolving any team disputes down the line.
Your payroll system should be able to distinguish payment types, and you should document reasons for every discretionary bonus you pay (e.g. “one-off Christmas bonus, no ongoing entitlement”).
Step 4: Superannuation and Tax Compliance
Remember, you must pay super on all non-discretionary payments counted as OTE. For discretionary payments, check carefully – if in doubt, seek advice from an accountant or legal expert.
This is especially important when it comes to commissions, bonuses, and allowances – many employers unintentionally underpay super when they’re unsure about the distinction.
Step 5: Review Regularly and Keep Up With Legislation
Both Awards and tax law can change. Set a process for reviewing your employment contracts and pay structures at least annually, especially as your team grows or changes.
When in doubt, get a legal health check to spot risks and make sure your business is set up for success.
What Legal Documents Should I Have in Place?
To properly set out and manage discretionary vs non-discretionary payments, you should ensure the following documents are up to date:
- Employment Agreement: Sets out the base salary, expectations, and any guaranteed bonuses or rates. Keep discretionary payments out of this unless you want them to be considered entitlements. Learn more about employment contracts.
- Bonus & Commission Schemes: Clear, written policies or plans define when and how staff receive extra payments – and whether they’re guaranteed (non-discretionary) or voluntary (discretionary).
- Payroll & Record-Keeping Policies: Documenting how you record each type of payment (and why) is vital for Fair Work and ATO compliance.
- Workplace Policy or Staff Handbook: Describes your general approach to incentives, rewards, and bonuses – and can clarify non-discretionary versus discretionary payments. See our guide to drafting a staff handbook.
If your business operates under an Award or enterprise agreement, it’s also important to check any clauses that refer to incentive payments, loadings, or allowances, as these usually fall under non-discretionary.
Common Mistakes: How to Avoid Disputes and Penalties
Even established businesses can slip up when it comes to correctly classifying and paying bonuses or allowances. Here are a few traps to watch out for:
- Including “discretionary” payments in contracts or policies. If you promise a “discretionary” annual bonus in writing, it may become a legal entitlement – making it non-discretionary.
- Failing to pay super on non-discretionary pay. If you incorrectly treat a performance bonus as discretionary, you might underpay super. This could attract ATO audits and back payments.
- Ambiguous incentive schemes. Vague wording about “possible bonuses” sets up disputes – employees may assume it’s an entitlement.
- Not updating documents after introducing new incentive programs. If you introduce a “quarterly bonus” but don’t clarify how it’s determined (or if it’s at your discretion), confusion can lead to workplace complaints.
- Overlooking Award and NES requirements. Many industries have Awards that specify required payments – ignoring these can breach Fair Work obligations.
These mistakes can not only cost you time and money, but also damage trust with your employees. Getting sound legal advice at the outset is a wise investment.
FAQs About Discretionary vs Non-Discretionary Payments
Are All Bonuses Discretionary?
No. Bonuses are only “discretionary” if they’re not included in a contract or policy, and there is no expectation or entitlement (even implied) for them to be paid. If the arrangement or business culture leads employees to expect a regular bonus, the law may treat it as non-discretionary.
Do I Need to Pay Super on All Employee Payments?
No. Superannuation is required on ordinary time earnings, which generally covers salary, commissions, and non-discretionary bonuses – but not on true discretionary bonuses. If in doubt, check with the ATO or a trusted advisor before making large payments without super.
What If My Incentive Scheme Is Ambiguous?
If unclear, ambiguous, or poorly documented, an incentive scheme can expose you to legal risk. If you want payments to be truly discretionary, state this clearly in writing and keep them out of formal policies. When in doubt, our legal team can review your contracts and policies.
Can I Change a Non-Discretionary Bonus to Discretionary?
If a bonus is in the contract or policy, you can’t unilaterally remove or change it – employment law requires agreement from both parties. If you want to change the structure, you’ll need to consult with staff and possibly update contracts (ideally with legal support to avoid breaching agreements).
Key Takeaways
- The difference between discretionary vs non-discretionary payments is essential for Australian employers – affecting super, tax, leave, and compliance.
- Non-discretionary payments are guaranteed or expected under an agreement, law or policy. Discretionary payments are voluntary and truly at the employer’s discretion.
- Mistakes in classification can mean costly back-pay, tax penalties, or employee disputes.
- Employment contracts, bonus/commission policies, and handbooks should be updated regularly to clarify entitlements and avoid ambiguity.
- Superannuation is required on non-discretionary payments (including most commissions and bonuses), but not on genuine discretionary bonuses.
- Regular legal reviews can keep your business on the right side of the rules, grow employee trust, and protect your business as it scales.
If you’d like a consultation on managing discretionary vs non-discretionary payments for your team, contact us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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