End of year bonus questions answered

The 13th cheque or Christmas Bonus

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.

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.

Information for this article from – The South African Labour Guide

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