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It’s again time for that 13th cheque: Is an employer obligated to pay annual bonuses?

We are in the middle of November and employees across the country are without a doubt already busy making the most wonderful plans with their ‘Christmas bonus’ that has been paid or about to be paid. Some people are maybe planning to pay off some debt, or to spoil the family with a special holiday. Or maybe some people want to spoil themselves or their loved ones by acquiring luxury items without any guilt, in order to celebrate this special time of the year.

That is all good and well, but the hard reality is that many employers are increasingly of the view that they cannot afford the sudden doubling in employee costs. Employees are then called together and informed that it is regrettable that the employer is going through a difficult time, so there won’t be any bonuses. Employees should be thankful that they at least have a job.

This is followed with disappointment and fury in the air, referrals to the CCMA and threats of legal action by employees against the employer. This is regrettable and unnecessary. It can be avoided if both the employer and employees (a) understand their rights and the law, (b) make precautions and plan well and (c) openly communicate with one another, long before any misplaced expectations of bonuses arise, just to be smashed later on.

 

What does the law say?

We hear many times the myth that our labour laws automatically obligate an employer to pay annual bonuses. There is definitely no such determination in our labour legislation. What the law does say to employers, is the following:

  • If employees’ contracts of employment provide for the payment of bonuses, they then have an enforceable right to receive bonuses. This is standard contract law – both the employer and employee are bound, or liable to comply with the written agreement between them.
  • It is not only the provisions of employees’ individual contracts of employment that must be considered, but also any policy of the employer as well as the provisions of any collective agreement.
  • Prerequisites must be specified, for example, in respect of the profitability of the business, employees’ job performance or employees’ contribution to the business’s profitability. Do the employer have unlimited discretion in the decision whether bonuses are payable or not?
  • Even if it has not been agreed specifically that annual bonuses will be paid, the employer may still be bound or liable to pay annual bonuses if bonuses were regularly paid in the past. It may be viewed as an unfair labour practice to deviate from an entrenched or established procedure or practice, without consulting with the employees in advance. Apart from the legal requirements, it will negatively affect employees’ morale in case an expectation to receive an annual bonus, which has been established over the years, is suddenly disappointed with short notice.
  • Be cautious to differentiate between employees that perform the same or similar work – it is certainly a breeding ground for disputes and complaints/grievances of unfair labour practices.

 

Take precautions and plan in advance

Employers: Obtain professional advice in scrutinising contracts of employment and company policies. Ensure that full discretion is retained and not forced to pay bonuses that the business cannot afford. Obtain legal and professional advice about how to pay bonuses regularly in years of prosperity without creating expectations which in difficult years could be enforced by employees. Be aware of expected cash flow so that it is known in advance whether bonuses would be paid or not in a particular year.

Employees: Do not spend bonuses before it is certain what amount, if any, will be paid. Bear in mind that the income tax deductible will be greater than normal – ask the employer for an estimate from the applicable tax tables. Spend the 13th cheque wisely.

Wallace Albertyn is a Senior Associate and Labour Law Practitioner at LabourMan Consultants.