Dear Mary, I’m researching ways to increase sales and I think I’d like to offer bonuses to my employees. Are there any special rules I should know about paying bonuses?

A cash bonus is a payment that is based on performance and earned at the end of a bonus period. Employers often use cash bonuses to incentivize employees to increase performance or productivity.

The terms of any bonus program should be in writing, and the arrangement must comply with wage and hour laws. You should consider whether a team or group of employees will have the same bonus plan, or whether you will negotiate separate formulas for each employee.

Many employers require that an employee remain employed through the end of the performance period in order to receive the bonus. Setting up annual or quarterly bonuses instead of monthly bonuses can help retain key employees. I recommend expressly stating in your written bonus plan that the continued employment requirement is for the purpose of employee retention.

You could also pay bonuses in an ad hoc manner, but if the point of having a bonus system is to reward top performance, it’s probably a better idea to have targets set in advance so that employees know what they’re aiming for.

Consider what kind of performance targets are reasonable. Your bonus scale could be based on net income, sales, revenues, or whatever works best for your business. Managers can receive bonuses for their team performance, or for achieving set metrics. Bonus timing should be set in a way that works for your business. Seasonal businesses often pay bonuses at the end of their busy season(s).

Keep in mind that performance doesn’t always mean an increase or positive result. Depending on your business or your financial situation, sometimes maintaining the status quo or limiting losses can be extremely beneficial to the company and worthy of a bonus.

The terms of your bonus agreement should, at minimum, explain which employees are eligible to participate, how they become eligible, how bonuses will be calculated, and the period of time in which the performance will be measured.

If you are a publicly traded company or wish to offer equity bonuses, you should check with your attorney before you structure your bonus plan. There are many pitfalls about certain forms of performance-based compensation at the state and federal levels.

Employers must be careful not to run afoul of overtime rules for time or attendance-based bonuses, unless the employer truly retains absolute discretion as to whether to award a bonus. A “Christmas bonus,” in which the employer decides whether to give a bonus and how much to award, is a good example of a discretionary bonus.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached atmary@hudsonluros.com or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.