It's Bonus Time Again

This is an annual update on the bonus issue,  which crops up every year around about this time. Every year, there are arguments between employers and employees regarding bonuses, and a number of these arguments do end up at the CCMA. Firstly, it is necessary to understand that there is no statutory requirement to pay bonuses of any sort, and any such payments that are made are not regulated by labour legislation.

It is on the basis of unfair labour practice that many disputes are referred to the CCMA - but these disputes do not exceed on the basis of it being an unfair labour practice. Generally, if the bonus is guaranteed - such as into being a guaranteed payment stipulated in the employment contract - then the employer is not left with much choice - he must pay the bonus.

However,  where the payment of the bonus is dependent on certain criteria being met - such as the employee’s hours of work, or  the employee's performance or to the performance of the company, or the branch, or the department in which the employee is employed, the employer is under no obligation to bonus unless those criteria are complied with.

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.

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," but it is usually stipulated that this is payable entirely at management discretion, and it is specifically stated that it is not guaranteed

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 problem arises because employees who have been paid a bonus consistently for the past two or three years, come to depend on receiving the bonus in December - they make holiday arrangements in advance, taking into account what they expect the bonus to be. When the bonus is not paid, the problem starts.

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. This is because it appears that the issue of bonus payments does not fall under “ a matter of right” and this it is a guaranteed payment, but rather it falls under “ a matter of mutual interest.” Obviously we can only address the issue in general terms in this article, because every case is unique.

By far the greater number of enquiries on our e-mail facility received over the December holiday period is from employees complaining about the non-payment of bonuses. In the main, these complaints concerned cases where, in  past years,  the bonus had been consistently paid, but in December 2007 employees were informed on the last day of work 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 visited 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 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 might arise 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.

These unilateral decisions by management also include in some instances, the decision to only pay half the bonus in December and the other half in February or March of the following year. If such a decision is implemented without any prior warning or consultation with employees, problems may result. 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. 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 than disgruntled employees.

You may also be interesting in this article on The Payment of Bonuses

http://www.labourguide.co.za/conditions-of-employment/the-payment-of-bonuses-665

 The Payment of Bonuses 

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.

 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.