Performance Bonuses: An Employer’s Discretion or an Employee’s Entitlement?

Author: Clyde Bonnici

Clauses providing for yearly performance bonuses have become a common feature in employment contracts in Malta. These clauses benefit both sides: employees get a financial incentive to hit their targets, and employers can attract top talent with competitive pay packages.

That said, performance bonuses don’t have the same legal protection as regular wages. Malta’s Employment and Industrial Relations Act specifically excludes bonuses linked to performance or production from its definition of wages. This means employers often tie these bonuses to conditions, most commonly the achievement of key performance indicators (KPIs), measurable targets set to evaluate an employee’s work performance.

But this doesn’t mean employers can do whatever they like when it comes to performance bonuses. Despite their exclusion from wage protections, Maltese Courts have in certain cases treated these performance bonuses not as a matter of employer discretion, but as something employees are entitled to.

Under Maltese employment law, performance bonuses are not classified as wages, yet Courts have repeatedly ruled that employers cannot withhold them arbitrarily once they are contractually agreed.

Payment of Performance Bonuses as a Contractual Obligation

The Maltese First Hall of the Civil Court had the opportunity to discuss performance bonuses in the recent judgement dated the 27th March 2026 in the names James Genovese vs Air Malta plc. Plaintiff in that case, the defendant company’s Chief Human Resources Officer, argued that the defendant company had defaulted in its obligations by failing to pay him the performance bonuses to which he was eligible and entitled in terms of both his latest and previous employment contracts with the company. The defendant employer retorted that such bonus was not due since (1) it was discretionary, (2) because the employment contract required this bonus to be regulated by a company policy, which policy was never published, and (3) because its payment was suspended due to the company’s financial difficulties.

The clause in the plaintiff’s previous employment contract did indeed stipulate that the payment of the performance bonus was to be regulated by a company policy. Said clause read as follows:

The Employee is eligible to participate in the Company’s annual performance management process. As a result of this the employee may be entitled to a Performance Bonus not exceeding 20% of the annual salary as regulated by Company policy.

On the other hand, the clause in the plaintiff’s latest employment contract did not reference company policies, but vested the defendant company with a strong degree of discretion. It provided the following:

The Employee shall be entitled to a Performance Bonus up to a maximum of ten thousand Euro (€10,000) per annum if and to the extent that relevant key performance indicators (KPIs) shall have been met. Such KPIs shall be set by the Company, after consultation with the Employee, on a fair and reasonable basis before the commencement of each financial year of the Company, it being understood that the final decision as to the setting of the KPIs rests with the Company.

The Court first dealt with the discretionary nature of the bonus. It quoted previous jurisprudence to the effect that while there was indeed a discretionary element to such bonuses, once the payment of the bonus was agreed to in the contract between the parties, the payment of the bonus could not be left to the employer’s unfettered discretion. Such an interpretation would make the obligation to pay the bonus contingent solely upon the will of the person bound to pay it. Clauses of the sort, whereby an obligation is contracted on a condition which makes the obligation depend solely upon the will of the person by whom the obligation is owed (referred to as potestative conditions) are null in terms of Maltese law. The employer’s discretion was thus not absolute, and it could not unilaterally release itself from the contractual covenant to pay the bonus.

On the basis of this reasoning, the Court found the employer to have acted in default of its contractual obligations by failing to establish the policy on which the payment of the performance bonus in terms of the plaintiff’s previous employment contract was contingent. Since this employment contract provided that the performance bonus was to be regulated by company policy, the Court held that this effectively imposed on the employer an obligation to establish said policy. The employer could not therefore use to its own advantage, and to the plaintiff’s prejudice, its own failure to adopt a policy of the sort.

Insofar as the company’s financial position as justification for its failure to pay the bonus, the Court opined, citing previous jurisprudence, that this was no excuse. Once the employer contracted an obligation to pay the bonus, its financial difficulties does not free it from paying that which was agreed. The fact that it was plaintiff himself, in his HR role, that announced to the employees the suspension of the performance bonus payments, did not mean that he was foregoing his entitlement to same.

Having made the above considerations, the Court ultimately found the employer liable to pay the performance bonus due to the employee. Crucially, the Court shifted onto the employer the burden of proving that the plaintiff did not deserve the performance bonus. Its failure to produce evidence to this effect meant that the bonus to be paid to the employee was to be fixed close to the maximum threshold of the entitlement, especially since the evidence provided by the employee showed he had performed his duties with diligence and efficiency. The Court eventually fixed the amount of performance bonus due to the employee for 6 years of employment across both employment contracts to a significant €65,000.

Performance Bonus in Malta: What the Contract Must Say

While the judgement in James Genovese vs Air Malta plc was a showcase of the Court’s authority to review and revise the employer’s discretion in awarding performance bonuses, previous jurisprudence made it clear that it is only upon the satisfaction of the conditions envisaged in the contract for the payment of the performance bonus that such bonus is due.

Where, in one case, the eligibility criteria for a performance bonus included a requirement that ‘employees need to be in employment at the time when the payment is issued’, an employee who had resigned from his employment a month before performance bonuses were due to be paid could not successfully claim payment of said bonus.

Where, in another case, eligibility to receive a performance bonus was contingent on both the employee and the company reaching their targets, the employee could not successfully claim payment of said bonus without bringing forth proof that both the employee and the company succeeded in their performances, thereby satisfying the requirements for the performance bonus to be paid out.

In one 2025 judgement, the employment contract of an employee envisaged two bonuses: one contingent on the company reaching its targets, and another one dependant on the employee successfully achieving his KPIs. The company proved to the Court’s satisfaction that it had not successfully reached its targets, and thus the former bonus was not due. Insofar as the latter bonus, however, the Court considered that the wording of the relevant clause left no discretion to the company: ‘the employee will be eligible for a bonus (…) on achievement of periodic personal Key Performance indicators.’ The Court therefore held that the burden was on the company to prove that the employee did not achieve his KPIs. Since the Company failed to bring such proof, the Court found the employee entitled to said performance bonus.

When Performance Bonuses in Malta become a  Disciplinary Perspective

The importance of performance bonuses, this time from a disciplinary perspective, was discussed in another recent judgement by the First Hall of the Civil Court dated the 14^th January 2026 in the names Stephen Caruana vs Casino Maltese Limited. In that case, a security guard claimed the defendant company unfairly dismissed him, which dismissal the company argued was justified due to plaintiff’s bad performance. While the Court found that the employee had indeed failed to perform his duties on a number of occasions, the Court held it illogical for an employer to argue non-performance if the employee in question was being consistently awarded performance bonuses. According to the Court, this does not lead to the clarity and proportionality required for dismissal to be just, and found in favour of the employee.

Conclusion

The judgements of the Maltese Courts on the topic of performance bonus illustrate that there is more to these clauses than meets the eye. What can seem like an innocuous performance bonus clause intended to motivate the employee, may give rise to legal quandaries revolving around employer discretion and employee entitlement. One thing which emerges undisputably clear from these judgements however is that employers are to act cautiously when it comes to the drafting of performance bonus clauses in employment contracts, and also in issuing payment of said bonus. Otherwise, such payment can easily turn into a double-edged sword for the employer. If the employer refuses to pay the performance bonus, it risks the employee taking legal action to have the Court order payment. On the other hand, if the employer does pay the bonus, that payment could be used against it should it later need to take disciplinary action against the employee.

Frequently Asked Questions

Are performance bonuses legally required in Malta?

No. Performance bonuses are not classified as wages under the Malta’s Employment and Industrial Relations Act. However, once a bonus is written into an employment contract, it becomes a contractual obligation that Maltese Courts will enforce.

Can an employer in Malta refuse to pay a performance bonus?

Not freely. While employers retain some discretion, Maltese Courts have ruled that this discretion cannot be absolute. An employer cannot unilaterally withhold a bonus that was contractually promised, nor use its own failure to set policies or KPIs as a justification for non-payment.

What happens if KPIs are never set by the employer?

The Courts have held that the obligation to set KPIs rests with the employer. If the employer fails to do so, it cannot use that failure to deny the employee their bonus entitlement.

Can paying a performance bonus affect a disciplinary case?

Yes. Maltese Courts have found it contradictory for an employer to claim an employee performed poorly while simultaneously having awarded that employee performance bonuses. This inconsistency can undermine a dismissal case.

What should employers include in a performance bonus clause?

Employers should clearly define eligibility criteria, the method of calculation, the KPIs required, and any conditions that may suspend or forfeit the bonus. Vague or purely discretionary clauses carry significant legal risk under Maltese law.