There is no statutory or legal requirement that employers must pay any bonus. Therefore, any such payments are not regulated by labour legislation.
Types of Bonuses
There are three types of bonuses that are normally paid by employers.
Performance bonus – the payment of a performance bonus and the amount of the bonus may depend on or relate to the employee’s hours of work, or to the employee’s performance or to the performance of the company.
13th Cheque bonus – the payment of a 13th cheque or “Christmas” bonus bears no relation to the employee’s hours of work or job performance, but is related solely to the overall performance of the company. 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.
Customary bonus – the payment of this bonus is simply because of established practice or “custom and practice”. Because of the consistent “established practice” or “custom and practice”, the bonus payment becomes a term or condition of employment.
Bonus Payment Principles
Employers should note that where a bonus is a contractual condition stipulated in the employee’s contract of employment, or a contractual condition stipulated 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, it must also be stipulated in the employment contract.
If bonuses have been paid in the past, it is unfair of the employer to decide unilaterally not to pay bonuses, or either not advise the employees at all, or advise the employees at the last possible minute.
Whilst the right of expectation does not actually afford the employees the absolute right to demand and to be paid the bonus, it certainly does afford them the right to be heard before the decision not to pay the bonuses is made by the employer.
If an employer decides not to pay a bonus, 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 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 annual shut-down day or annual closure that company profitability disallows the payment of bonuses for this year, or the employer 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 is that the management of any company must surely be aware by the middle of the year whether or not profitability, employees’ performance, or whatever other criteria exist, may jeopardise 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 employees 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 employees 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 employees discover the non-payment for themselves, there is nothing the employees can do until the company re-opens in January. It is a pretty dumb thing to do as it does not solve the problem, it only postpones it until next year.