How to Correctly Structure Employee Bonuses and KPIs Under Czech Law

Are you considering implementing bonuses, premiums, or KPIs for your employees? Setting up a proper remuneration system is crucial, yet poorly defined conditions carry the risk of high fines from the State Labour Inspection Authority (SÚIP) and tax assessments. In this article, you will find specific answers on how to structure bonuses correctly under Czech law and motivate your team without the risk of sanctions.

Do you need advice on this topic? Contact our law firm in Prague at office@arws.cz or call +420 245 007 740. Your inquiry will be handled by "Mgr. Jan Pavlík", an expert on the Czech legal system and employment matters.

When does "goodwill" become a legal entitlement? The trap of mandatory vs. discretionary pay

Many managers believe that a "bonus" is inherently a voluntary payment. However, this is a dangerous legal myth that can cost a company millions. Czech labor law divides variable components of wages into two entirely different categories.

The first is the discretionary (non-mandatory) component. As the name suggests, the employee does not have an automatic legal right to its payment, even after meeting targets. Its granting depends entirely on the final discretion of the employer. Typically, these are annual bonuses or extraordinary rewards where you want to maintain flexibility.

The second is the mandatory (entitlement) component. Once an employee meets pre-defined and precisely specified conditions (e.g., a clear mathematical formula in a bonus scheme), the employer has a legal obligation under Czech law to pay this component. The employee can successfully claim it through Czech courts.

How a discretionary bonus becomes mandatory (even against your will)

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

1. Overly precise criteria: If your internal regulations define the bonus as a purely mathematical calculation (e.g., "upon 100% KPI fulfillment = 20,000 CZK bonus") and do not include a clause regarding the employer's final constitutive decision, a court will evaluate it as a mandatory component.

2. Manager's decision: Even a fully discretionary bonus becomes mandatory the moment a supervisor demonstrably informs the employee that the bonus has been granted. From that point on, it is a binding obligation.

3. Repeated payment (customary 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 a custom and a tacit part of the wage.

The foundation of your protection is precise wording. Your Internal Wage Regulation or Bonus Scheme must clearly specify which components are mandatory and which are discretionary, and for discretionary ones, it must be explicitly stated that there is no legal entitlement to their granting.

Our Prague-based attorneys draft wage regulations and employment contracts daily. We will ensure your bonuses remain truly discretionary and that you maintain your flexibility. Do you need a document review? Write to us at office@arws.cz.

What exactly will the SÚIP focus on during a remuneration audit?

The State Labor Inspection Office (SÚIP) has made remuneration one of its main inspection priorities for 2025. Inspectors no longer just look for errors in payslips or missing guaranteed minimum wages.

Inspections are specifically targeted at equal pay for men and women and any forms of hidden discrimination in bonus systems. For "common" errors in labor relations, which include remuneration, fines exceeding 45 million CZK were issued in 2024.

Red Flag No. 1: "Attendance Bonus"

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

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

Red Flag No. 2: Pay Secrecy Clauses

The practice where an employer prohibited employees from discussing their salary levels was common until recently. Today, however, it is explicitly prohibited under Czech legislation. 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 ethics. Our Czech legal team 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 office@arws.cz.

SÚIP Inspections and Labor Disputes

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

FAQ – Legal Tips for Setting Up Bonuses

• Can we withhold a bonus if an employee is frequently on sick leave?
  If a "bonus" is defined as a mandatory component of the wage linked to hours worked or actual performance, it is logically reduced during sick leave. However, if it is a "penalty" for the illness itself (such as an attendance bonus), it constitutes discrimination under Czech law. We recommend setting criteria based on positive performance rather than "punishing" absence. If you are dealing with a similar issue, contact us at office@arws.cz.
• Is an employee who resigned in November entitled to an annual bonus?
  Czech case law is key here. If the bonus is a reward for past performance (for the year worked), the entitlement likely exists. However, if you have cleverly set a condition in the bonus scheme requiring the employment relationship to exist on the payment date (e.g., March 31 of the following year) and the bonus also has a motivational (future) character, Czech courts tend to rule that the entitlement did not arise. For the correct setup of these conditions, write to us at office@arws.cz.
• What if our KPIs are set subjectively "based on manager satisfaction"?
  This is very risky. Firstly, the State Labour Inspection Authority may label it as non-transparent and potentially discriminatory. Secondly, such an expense is difficult to justify to the Czech Tax Authority. KPIs should be as objective, measurable, and specific as possible. We can help you define KPIs in a legally secure manner – contact us at office@arws.cz.

KPIs That Hold Up: How to Face Tax Audits and Motivate Management

The Labour Inspection is not the only concern. Once you have a remuneration system that is too vague, the Czech Tax Authority will eventually come knocking. While the Labour Inspection checks employment law aspects (compliance with the Czech Labour Code, Section 110), the Tax Authority checks tax aspects.

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

Which KPIs are Risky for the Czech Tax Authority?

The greatest risk lies in subjective and unmeasurable criteria. Bonuses paid based on "satisfaction," "good work," or "team contribution" can easily be challenged by the tax administrator as costs unrelated to profit generation, leading to additional tax assessments.

A special category involves bonuses for management and executive directors. There is a high risk that if a bonus is not properly supported by a contract and linked to specific performance, it could be reclassified as a hidden profit distribution. This would mean not only an additional income tax assessment but also social and health insurance contributions.

Your remuneration system must survive two battles: appearing fair before the Labour Inspection and tax-deductible before the Tax Authority. These pressures often conflict: if a bonus is too discretionary, the Tax Authority will challenge it. If it is too clearly defined, it becomes a mandatory wage entitlement.

The attorneys and tax advisors at ARROWS have experience defending bonus systems for dozens of clients, including more than 150 joint-stock companies. We will prepare professional training for your management and HR on how to correctly set and evaluate KPIs. We provide comprehensive legal opinions to defend your remuneration system during a tax audit. Do you need tax and legal certainty? Write to office@arws.cz.

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

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

Global HR policies (often originating from the USA or UK) are drafted within a different legal environment. The Czech Labour Code is significantly stricter and provides higher levels of employee protection. Principles such as "equal pay for equal work" (Section 110) or protection against discrimination (Section 16) always take precedence over any internal directives from your parent company (HQ).

A typical risk is that global policies fail to distinguish between mandatory and discretionary wage components in the specific way required by Czech law. Relying solely 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 strictly comply with Czech legislation.

Thanks to our decade of practice and the ARROWS International network, we handle employment law matters with international elements on a daily basis. Our Prague-based attorneys can "translate" the requirements of your parent company (HQ) into the Czech legal framework. We ensure that your local contracts align with global strategy while protecting the Czech branch from sanctions. For assistance with international cases, contact us at office@arws.cz.

Tax Audits and Litigation

The following table illustrates the risks associated with tax and legal disputes, which are often more costly than the actual fines from the State Labour Inspection Office (SÚIP).

Conclusion: ARROWS as your partner for secure and effective remuneration

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

The foundation of protection is a precisely drafted Internal Wage Regulation and Bonus Policy. These documents must be dynamic, clear, and legally watertight under Czech law.

ARROWS provides comprehensive legal services – from preparing documentation that protects against fines to professional training for your management and representation before Czech courts and administrative authorities. Our experience with over 150 joint-stock companies and 250 LLCs (s.r.o.) allows us to identify risks that others overlook. At the same time, we are keen to hear your business ideas; we often connect our clients when we see mutual business opportunities.

Do you want to ensure your remuneration system is 100% compliant and truly motivating? Contact us at office@arws.cz for a tailored legal solution.

FAQ – Frequently asked legal questions regarding bonuses and KPIs in the Czech Republic

• What exactly is the difference between an internal wage regulation and a bonus policy under Czech law?
  An internal wage regulation is a comprehensive document that establishes the overall remuneration system (forms of wages, payment dates, etc.) in the Czech Republic. A bonus policy is often its annex or a separate document that goes into greater detail regarding specific bonuses – defining their purpose, indicators (KPIs), calculation basis, periods, and conditions for reduction or withdrawal. For the preparation of both documents, contact our Czech legal team at office@arws.cz.
• Can we condition the payment of an annual bonus on the employee working for us for another year?
  No, such a provision would be invalid under the Czech Labor Code. However, you can (as confirmed by the Supreme Court of the Czech Republic) set a condition that the entitlement to a bonus only arises for employees who are still in an employment relationship on a certain future date (e.g., the payout date). The key is that the bonus is not just a reward for the past, but also a motivation for the future. Our Prague-based attorneys can help you formulate this correctly; write to office@arws.cz.
• What is the penalty for not having a remuneration system in writing?
  Significant. Not only do you risk a fine from the State Labor Inspection Authority (SÚIP) for the absence of mandatory documentation, but more importantly, you have no defense. Employees may claim they were promised anything. A written wage regulation is your fundamental defense document in the Czech Republic. Do not hesitate to contact our law firm in Prague – office@arws.cz – and we will prepare it for you.
• Must bonuses also be paid to employees on work performance agreements (DPP) or agreements on work activity (DPČ)?
  The Czech Labor Code requires equal pay for the same work (Section 110). If an "agreement worker" performs the same work as a full-time employee, they should be entitled to the same basic remuneration. For bonuses, the situation is more complex. If a bonus is tied to performance that the "agreement worker" could fulfill, their exclusion could be considered discriminatory. We will be happy to provide a legal assessment at office@arws.cz.
• What should we do if a Labor Inspection (SÚIP) is already underway?
  Stay calm but act quickly. Provide the inspectors with full cooperation (failure to do so carries a fine of up to CZK 500,000), but do not provide information or documents that are not the subject of the inspection. Contact a legal representative immediately. We provide immediate legal assistance during SÚIP inspections in the Czech Republic. Contact us at office@arws.cz.
• Can an employee sue claiming their KPIs were unfair?
  Yes. If KPIs are set unrealistically, subjectively, or in a way that discriminates against a certain group, an employee can defend themselves in Czech courts. The employer must be able to prove that the KPIs are objective, fair, and linked to the nature of the work. We will review your KPIs to ensure they are legally sound under Czech legislation. Write to office@arws.cz.

Don't want to handle this issue alone? More than 2,000 clients trust ARROWS law firm, and we have been recognized as Law Firm of the Year 2024. Take a look HERE at our references; it would be our honor to assist you with your legal matters. Inquiries are free of charge.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact ARROWS law firm in Prague directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution, so please do not hesitate to contact our Czech legal team.

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