Internal pay policy

What it means

An internal pay policy is an employer’s internal document setting employees’ pay conditions. It defines pay rates or bands for each position, wage supplements, bonuses and rewards and the conditions for paying them, as well as pay dates and method.

The Labour Code allows pay conditions to be set in a collective agreement, an employment contract or another agreement. An employer without a trade union can also set them by internal policy, which then becomes one of the main sources of employees’ pay entitlements.

The policy must comply with the law and may not favour or disadvantage employees contrary to the principle of equal treatment. The employer must make it available to staff and inform them of changes. It cannot unilaterally reduce entitlements agreed in the employment contract.

How it works in practice

For growing companies, we help prepare a pay policy that simplifies payroll. Instead of individual arrangements in every contract, the policy sets rules for supplements, bonuses or long-service awards, and the contract only needs to refer to the policy and state the base pay.

The policy should clearly separate guaranteed and discretionary elements. A guaranteed bonus paid when criteria are met must be paid, while a discretionary reward is at the employer’s discretion. Vague wording leads to disputes over whether a bonus is owed.

With the arrival of pay transparency rules, the pay policy takes on new importance. Objective, documented pay criteria are the basis on which an employer explains pay differences and shows they are not caused by gender or other prohibited grounds.

What to watch out for

A frequent mistake is a policy written once and never updated. If it no longer reflects actual practice, employees may claim entitlements from it even though the company does not provide them. Policy and practice must match.

Changing the policy to employees’ detriment has limits. If an entitlement stems from the employment contract or long-standing practice, amending the policy alone may not remove it. For larger pay changes, it is better to proceed after consulting a lawyer.