The payment of bonuses

There is no statutory requirement in labour law to pay bonuses of any sort, and any such payments that are made are not regulated by labour legislation. This therefore is a contractual issue (or a company policy issue) rather than a labour law issue.

The payment of bonuses: re-visited

Source: The South African Labour Guide

I have covered the subject of bonus payments in previous newsletters, but once again we are being inundated with phone calls (and e-mails) from employees and employers alike on the subject.

Although the majority of these inquiries were from employees, every one was the result of a perceived unfair action by the employer.

Firstly, it is necessary to understand that there is no statutory requirement in labour law to pay bonuses of any sort, and any such payments that are made are not regulated by labour legislation. This therefore is a contractual issue (or a company policy issue) rather than a labour law issue.

In some instances, the payment of the bonus and the amount of the bonus may depend on or relate to the employees hours of work, or to the employee’s performance or to the performance of the company, or the branch, or the department in which the employee is employed.  Such bonuses are normally referred to as “performance bonus” or “production bonus.” The attaining of production targets in terms of quality or quantity, and the attaining of sales targets are common criteria used in the calculation of such bonuses.

Another factor deciding the payment or non-payment might be the employee’s score in a performance appraisal test.

It follows therefore that the payment of such bonuses is seldom guaranteed, and employees would be foolish to rely on the payment of these discretionary bonuses simply because the bonus was paid last year or over the past 3 years and so on.

In other instances, a bonus is paid which bears no relation to the employees hours of work, but is related solely to the overall performance of the company or the branch.  These bonuses are usually referred to as  “a 13th cheque.”

Whether or not the bonus is paid, is dependent either on the terms and conditions of the individual Contract of Employment, or it may be dependent on Company Policy, or it may be dependent on certain targets being reached in terms of production or sales, or it may be dependent upon Company performance in terms of gross profits or any other criteria stipulated by the employer. It may also be a bonus that is paid simply because of established practice or “custom and practice” as it is sometimes termed. Because of the consistent “established practice” or “custom and practice”, the bonus payment becomes a term or condition of employment.

The important thing to note here is that the declaration off bonus payments by the employer is a contractual issue and not a Labour Law issue, except where the non-payment of the bonus may fall under the definition of Unfair Labour Practice with respect to the provision of benefits, or may be construed as a unilateral change to terms and conditions of employment.

In the main, these complaints concerned cases where, in past years,  the bonus had been consistently paid, but at the last minute employees are informed that this year they would be no bonus.  In some instances, employees had not been informed at all, but only discovered that no bonus had been paid when they visit the bank to withdraw funds. Some of the bonuses were a 13th cheque, others were annual performance bonuses, others were termed “anniversary bonuses.” In many cases, the payment of the bonus was a contractual requirement, some being a guaranteed payment in terms of the contract, others being a discretionary payment.

Whatever the case, employers should note that where a bonus is a contractual condition embodied in the employee’s contract of employment, or a contractual condition embodied in a Company Policy, or where the payment of the bonus has become a condition of employment through established practice, then the bonus must be paid.  A unilateral failure to pay the bonus may amount to an unfair labour practice (section 186 and also section 191 of the Labour Relations Act), or it may be seen as a unilateral change to terms and conditions of employment, or indeed may be seen as breach of contract, where the employee would be entitled to sue for damages, or (more likely) would sue for specific performance.

It is essential that in every employment contract, the terms and conditions applicable to the payment of bonuses must be specifically and clearly stated, even to the extent that if it is a Company policy not to pay bonuses of any sort, this fact must also be stipulated in the employment contract.

In those instances where the bonus has been consistently paid over previous years, whether a contractual condition exists or not, the employee has undoubtedly developed a very strong right of expectation that the bonus will also be paid in the current year.  Having been given no indication to the contrary, the employee’s right of expectation is even stronger, and when the employee is suddenly informed by means of a letter attached to his pay slip that there will be no bonus this year, or until he discovers it himself by visiting the bank, trouble looms for the employer.

It is certainly unfair of the employer to decide unilaterally not to pay bonuses, and in addition to either not advise the employee at all, or advise the employee at the last possible minute.

Whilst the right of expectation does not actually afford the employee the absolute right to demand and to be paid the bonus, it certainly does afford him the right to be heard before the decision not to pay the bonuses is made by the employer.

This would imply then that the employer should consult with employees if it is found that, for any legitimate reason or sound commercial rationale, the bonuses cannot be paid in a particular year, or if the amount of the bonus is to be to be less than the amount consistently paid in the past, or less than the contractual amount. Remember that Company Policy is invariably construed to form part of the employment contract.

Employees are entitled to put their side of the story, and it cannot be denied that this opportunity is a fundamental requirement of “fair procedure.”

It cannot be accepted, by any stretch of the imagination, that an employer suddenly discovers only on shut-down day that Company profitability disallows the payment of bonuses for this year, or he suddenly discovers on shut-down day that employees have not been performing and therefore the payment of bonuses this year is not justified and so on.

To make matters worse, after suddenly discovering these hitherto completely unknown facts, the CEO and M.D. of the company take off on an extended holiday to the Seychelles, Mauritius and the Maldives.

The message here is that the management of any company must surely be aware by the middle of the year whether or not profitability, staff performance, or whatever other criteria exist, may endanger or even prevent the payment of the relevant bonuses for that year. It is the duty of management (and it is only fair ) to consult with the staff at the earliest possible moment, to warn them of this possibility that bonuses may not be paid or may be reduced this year, or if necessary take the extreme precaution of informing staff categorically that no bonuses will be paid for that year. If it is later proved that payment can be proceeded with, then it will be a pleasant surprise for all employees.

The “thinking” – if it can be termed such – of management is that if the non-payment of bonuses is only made known on shut-down day, or if management remain silent and let the employee discover the non-payment for himself, there is nothing the employees can do until the Company re-opens in January, by which time the employees will have “cooled off” anyway, and are unlikely to raise the issue. That kind of thinking is pretty dumb to say the least – and it does not solve the problem – it only postpones it until next year.

Previous articles on bonuses

THE PAYMENT OF BONUSES: PART 1  

We receive a large number of inquiries on our e-mail facility regarding the payment of bonuses. Generally, the most common questions are “what does the law say about bonuses?” and “can we hold back the payment of bonuses until February?”  and “can we pay off bonus in December and half in January?”  and so on.

Firstly, at the outset, it must be understood that Labour Law is silent on the question of bonuses. This means that the payment or non-payment of bonuses is a matter entirely for the employer to decide, and to negotiate with employees.  If an employer who presently does not pay bonuses of any sort wishes to continue on that route he can do so, without fear of being accused of unfair labour practice.

We will deal with the three common types of bonus, namely the Christmas bonus or 13th cheque as it is known, the performance bonus and  the production bonus.

It is very important to look at the contract of employment as well. If the contract indicates that an employee will receive a 13th cheque for example the employer will be obligated to pay the amount. The employee will therefore be entitled to such payment if it is stated in the contract of employment. Clients are advised to contact Derek advice@labourguide.co.za with regards to the wording, should you have any doubt. (free service)

The 13th cheque or Christmas bonus.

This bonus is normally classed as a gratuity – in other words, a payment of gratitude by the employer to the employee in recognition of a job well done, or if you like, going the extra mile. However, over the years most employees have come to expect the payment of the 13th Cheque as a right or entitlement, or as a condition of employment.  This is evidenced by the fact that at  job application interviews most applicants will ask “do you pay a 13th Cheque?” In other words, they expect to be paid a 13th cheque irrespective of whether the job is well done or irrespective of whether they travel the extra mile. They want the payment of a 13th cheque to be incorporated as a condition of employment. It is therefore up to the employer to get things back onto a proper footing.  Many employers these days have done away with the payment of a 13th cheque and have incorporated the amount into the employees basic salary.

There may come a time, when after a bad trading year, an employer is unable to pay a 13th cheque despite having paid consistently for the last ten years. It is highly necessary that the employees be informed at least six months in advance that the 13th cheque will not be paid this year.  Some employers may argue that they don’t know six months in advance that they will be unable to pay the bonus, but surely by midyear they must have some idea of what the profits will be like at the end of the year. To suddenly advise employees as late as November or early December that no bonuses will be paid this year could land you up at the CCMA on a charge of unfair labour practice with respect to the provision of benefits.

The employer must bear in mind that many employees count the amount of the bonus into their normal household budget during the holiday season, and they depend on the bonus to pay for the annual holiday, Christmas presents and so on.  To suddenly inform them at the last minute that there will be no bonus this year is indeed unfair, and should be avoided.

Employers must examine their policy regarding the payment of the 13th cheque and should revise this so that this type of bonus is paid only to those employees who genuinely do the job well and go the extra mile.

The performance bonus. 

A performance bonus is normally paid for good performance, and should be based as a percentage of the employees salary or wages.  A performance bonus can also be paid as a lump sum to a department, and split up in equal amounts to each employee in that department. This would apply in the situation where all employees in a particular department are collectively responsible for above-average performance.  The performance would be measured against laid down company standards, but the bonus would not be paid only for the occasional work done which exceeds company standards, but for consistent work exceeding company standards. This means that line management and the shop foremen and even supervisors have to become much more closely involved with the monitoring of performance on the shop floor and careful records must be kept. In a situation where the results achieved by a department depend entirely on the collective effort of all employees in the department, the amount of the bonus could be calculated on the basis of a percentage of profits achieved over and above what was budgeted for, or as a percentage of the total profits generated by the department and so on.

Whatever the case, the method of calculation must be fair and equitable.

The production bonus. 

The production bonus is based, not on performance measured against company standards, but rather on production measured against targets.  Measurement is also based on quality of production. In other words if the company has set a target for one particular employee or, for that matter, for a particular department to produce 100 widgets per hour, and the employee or department consistently produce 130 widgets per hour, then a production bonus would be justified. Similarly, if the company rule is that a rejection rate of 5 percent is acceptable, but the department consistently achieves a rejection rate of only 1%, then a production bonus would be in order. It must be admitted that the additional production and the reduced rejection rate can only mean good management within the department, and it can only mean a genuine interest in the job by the employees, thus generating additional profits for the shareholders.

The payment of bonuses. 

In the case of the employer who presently does not pay bonuses of any sort, it is entirely up to the employer to decide whether he wishes to pay bonuses or not. However in the case of the employer who presently pays bonuses the situation is slightly different because those employees have now come to expect the payment of the bonus as a right or entitlement. Therefore, those employers who now wish to change the status quo regarding payment of bonuses, either by paying less, or by paying at the different time of the year than what has been the case in the past, or by splitting what was an annual bonus into two separate payments, will have to consult with the employees, explain the problems, and try to get them to accept the new system. Employers must remember that such changes do constitute a change to the employees terms and conditions of employment, and this cannot be done unilaterally – it must be negotiated with the employees. The bottom line is that should the employees refuse to accept the change, but the employer has good,  sound and reasonable commercial rationale for making the change, then he can go ahead and implement it after negotiations, even if all employees do not agree to it. This is not to say that a few disgruntled employees will not proceed with a claim  of unfair labour practice, but that is a problem that will not prove to be insurmountable. In summary, be fair, be equitable and advise your employees in good time if there is to be a problem with the payment of bonuses or if there is to be a departure from the established payment procedures.

THE PAYMENT OF BONUSES – PART 2.

Due to the unexpectedly huge response to the article published in our newsletter in December 2003, it has been decided to publish a follow-up article to deal with the many questions raised by employers on this issue of bonuses.

Some of the questions raised were:

[a] we wish to split the bonus payment – 50% in December and 50% in March 2004. How do we do this and avoid disputes of unfair labour practice?

[b] we wish to delay payment of the annual bonus until March 2004 – how do we do this without disputes being declared?

[c] we cannot afford to pay a bonus this year –  what do we do ?

[d] we wish to withdraw the payment of bonuses completely – how do we go about this?

[e] we traditionally pay a 13th Cheque  (or 10% of annual salary ) as a bonus – we now wish to split this into two payments per year – one in January and one in June. How do we go about this?

[f] (This one came from an Employee’s Committee ) Our company has a bonus policy that lays down the payment of bonuses according to the employee’s performance. Performance reviews are carried out annually. However, over the past 8 years the company has simply paid every employee an annual bonus of 10% of annual salary, irrespective of the results of any performance interviews. Our staff have therefore developed a right of expectation regarding the payment of the annual bonus. We now have new management who have informed the staff that bonuses this year will be paid strictly according to the Bonus Policy, which means that quite a lot of employees will not get a bonus because they have not scored high enough in the performance review. Can we go to the CCMA to force the employer to pay the usual 10% to everybody as in the past?

Lets try to answer some of these questions. Firstly. Let me state that November or December is a bit late for the employer to suddenly decide that he wishes to change the annual bonus policy in respect of anything other than what has been the case previously.

1.  Never make the payment of any bonus a condition of employment.

In other words, do not include in the employee’s Contract of Employment, any reference to the payment of a bonus. Every employer should have in place a “Company Policy regulating the Payment of Bonuses.” At every employment interview which I have conducted, the applicant has never failed to ask “do you pay bonuses?” The answer should always be “We do not pay bonuses as a matter of course and the payment of bonuses is not guaranteed. Bonus payments in this company are regulated by our Company Policy Regulating the Payment of Bonuses. Whilst we have in the past usually paid a bonus, this is not guaranteed and is strictly regulated by our Policy. If you are employed here, you will be given a copy of that policy.”

Perhaps the most important clauses to be embodied in the Policy would be:

1.      that the payment of bonuses is not a right, and is not a term or condition of employment , but is solely at the discretion of the Board of Directors.

2.      that employees will be notified in writing not later than (say 1st October) each year of the decision of the Board of Directors regarding the payment or non-payment of bonuses for that year.

3.      that employees are advised that until such written notice is received, employees are to assume that no bonus will be declared for that year.

4.      that employees should not assume that bonuses will be paid for the current year simply because bonuses were paid in previous years or because the company “has had a good year”

5.      it is repeated that the declaration of  bonuses payable in any year is solely at the discretion of the Board of Directors.

6.      employees must not to rely on custom and practice as a reason to expect the payment of a bonus  in any year.

7.      employees are strongly advised not to include the amount of any bonus or expected bonus into household budgeting calculations.

In this way, employees can be left in no doubt about company policy regulating the payment of bonuses. The Policy can then proceed to lay down the method/s of calculation, payment dates etc. A good policy is to pay bonuses in December of each year, when the majority of employees are on leave and most families require money to pay for holidays, school uniforms, school books etc. We do not recommend that December salaries be paid early, except in the case where hourly paid employees receive their so-called “holiday pay” which is in fact their wages for the 3 weeks that they will be on annual leave.

With monthly paid staff, we recommend that the bonus can be paid out say on 15th December, and the December salary should be paid on the normal payday. This ensures that the employee still receives his/her salary at the end of December, and they are therefore prevented from “blowing the lot” in early December, and thus landing themselves in financial difficulty for the month of January (and beyond??).

2. Splitting the Bonus or postponing payment. 

So this year you have decided to split the bonus – paying 50% in December and 50% in March 2004,or you wish to postpone payment of the entire bonus until sometime in the first quarter of next year.

In our view, to make such a decision any later than say 30th September is, to say the least, very unfair. Your employees have always, for the past (xx) years, received a bonus in December every year. They depend on this bonus to pay for a well earned holiday, Christmas gifts for family and friends, perhaps to pay off a few debts, and to finance school uniforms, school books and school fees for the following year. Very few employees these days manage to save money during the year towards financing these heavy seasonal requirements. Never mind that they should save money. Never mind that they should “cut their cloth.”  Never mind that they should “live within their means.”  Never mind all these fancy financial principles and clichés. The fact is that they don’t.  To put it bluntly, without the bonus the employee is as good as dead. So yes, it is very unfair to suddenly change what has been a traditional payment made every year, and a payment that, by custom and practice, the employee now has a right to expect.

I can only suggest that, should there be absolutely no other alternative to splitting or delaying the bonus payment, that all employees should be called to a meeting and then the position must be carefully explained to them. It is further suggested that the Company seriously consider, andindeed should, offer to the affected employees such interest-free financial assistance as can be considered reasonable under the circumstances, by way of staff loans. These loans can be repaid (with the employee’s written consent) by means of deducting the amount advanced from the employee’s bonus when it is paid out.  Similar assistance could be offered to employees in those instances where the employer is simply unable to pay a bonus for the current year – employees can repay the loan in affordable monthly installments. It must of course be made clear that the financial assistance offered is a definite once-off facility for this particular instance only and does not in any way imply that future requests for financial assistance will be favorably entertained. That would be fair. 

Secondly, the employer must immediately and without delay proceed to amend his Company Policy Regulating the Payment of Bonuses (if indeed the employer does have such a Policy in place) to cater for the new circumstances, and provide each employee with a copy of the amended policy. It further strongly recommended that, every year, each employee is given a letter together with his bonus cheque, explaining that the payment of a bonus this year is not to be construed that a bonus will be paid next year, and emphasizing that Management reserve the right to withdraw the payment of bonuses at any time by giving the employee say 2 months written notice of any intention to withdraw the payment of future bonuses.

3. Implementation of a Policy where this has been traditionally ignored by the employer. 

The employer has a policy in place, but has not enforced the conditions of the policy for a number of years. He has simply paid a 10% bonus to everybody, ignoring the terms and conditions of the company policy regulating the payment of bonuses. Suddenly now, the employer decides to strictly apply the terms and conditions of the policy, which means in effect that some employees will receive no bonus at all, and others will receive less that the 10% received every year for the past (xx) years. The employees have, by custom and practice, developed a right of expectation and the have the right to continue to expect a 10% bonus annually. What does the employer do?

Firstly, one of the fundamental principles in labour law is that the employer must follow his own procedures. If he does not follow his own procedure, this, by implication, may be construed by employees that the procedure in question has been rescinded by the employer, and especially in the absence of any advice to the contrary from the employer to the employees. In such an instance, the employer would be out of line and grossly unfair to suddenly declare in the second week of December that “from now on the policy will be strictly applied.” In view of the fact that the employer failed to or ignored to apply his own procedure in the past does not now suddenly give him the right to resurrect that policy. To all intents and purposes, that policy is dead. Should the employer now wish to resurrect it, then he must  consult with all employees, advise them of the decision to now revive the Policy, and advise employees that the terms and conditions of that policy will apply from 1st January 2004.

Our view is that bonuses for 2003 should be paid out as normal, otherwise employees may have a right of action in terms of unfair labour practice with respect to the payment of benefits. The bottom line is that, with a performance based bonus, the employee must be advised NEVER to depend on receiving a bonus – the payment of a performance bonus depends 100% on the employee himself. If he doesn’t perform, he gets no bonus. The fact that the declaration of a bonus depends bonus entirely on the employee must be carefully explained to all employees, because they always seem to be convinced that the bonus will be paid regardless, and that it is their right to receive a bonus.

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