Payment of Bonuses – Labour Law

André Claassen and Jan du Toit

labourlaw 

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.

It is important to note that certain bargaining council agreements do make provision for the payment of bonuses. In the case of Bargaining Council and Collective agreements employers will have to respect these agreements.

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. 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.

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 employee’s terms and conditions of employment, and this cannot be done unilaterally – it must be negotiated with the employee.

 

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.

 

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.

 

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 go 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 employee’s basic salary.

 

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 definitely 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.

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 possible to pay the bonuses, then it will be a pleasant surprise for all employees.

The reasoning of management that if the non-payment of bonuses is only made known on shut-down day, or if they remain silent and let the employee discover the non-payment for themselves, 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 irresponsible and it does not solve the problem, it only postpones it until next year.

If employers cannot be fair to their employees with regard to the payment of benefits that employees have right to expect, either contractually or otherwise, then the employer cannot expect those employees to be fair to him.

There is no greater impediment to productivity in this country than disgruntled employees.

The performance bonus 

A performance bonus is normally paid for good performance, and should be based as a percentage of the employee’s 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.

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