“The best investment you will ever make are your employees” (Peter Drucker)
As the end of the year approaches, many employees are eagerly awaiting their 13th cheque or year-end bonus. However, not every employer is in a position to pay bonuses, and this can lead to disappointment, disputes, or even legal action if expectations aren’t managed properly.
Read on to find out whether you’re legally required to pay a bonus, and how you can avoid potential conflict.
What does the law say?
There’s a common misconception that South African law obliges employers to pay annual bonuses. This is not true. There’s no automatic legal requirement to pay a 13th cheque or other bonus unless certain conditions apply:
- Employment contracts: If the employee’s contract states that an annual bonus or 13th cheque is part of their remuneration or guaranteed rather than discretionary, you are legally obliged to pay it.
- Company policies or agreements: Bonuses may also be provided for in company policies, collective agreements, or other documents. You need to follow these agreements unless circumstances make it impossible to do so.
- Custom and practice: If your business has consistently paid bonuses in the past, this may have created a “right of expectation.” In such cases, suddenly discontinuing the bonus without prior consultation may be viewed as unfair, and employees could take legal action for unfair labour practices.
How to avoid disputes: Prepare, plan and communicate
You can avoid the common disputes over bonuses by focusing on three essential actions: preparing, planning and communicating.
1. Prepare
- Review all employment contracts and company policies. Ensure these documents are up-to-date and clearly state whether bonuses are discretionary or dependent on conditions such as company performance or employee contributions.
- Be aware of any past practices. If bonuses have been paid regularly in the past, employees will almost certainly assume this will continue, even without it being part of their contract. They could also think that bonuses are an automatic right, and not based on performance. If you’ve paid bonuses in previous years, structure your policies carefully so that paying a bonus in good years doesn’t create enforceable rights (or even unrealistic expectations) in less profitable years. Specific legal advice on this point is crucial to avoid disputes.
2. Plan
- Use cash-flow planning to assess your ability to pay bonuses so you can make informed decisions about whether or not you can afford bonuses, and to give you early warning of any possible challenges.
- When you’ve made your decision, think about how and when to tell your staff about it.
3. Communicate
- Clear and early communication is key to managing employee expectations. If you won’t be paying bonuses this year, or will be reducing the amount, let your employees know well in advance to avoid last-minute disappointment.
- If you are able to pay bonuses, take the opportunity to reinforce the link between performance and reward. Thank everyone for their hard work and contributions to the success of the business.
- Remind staff about the taxman waiting in the wings for his cut. This could come as a nasty shock, particularly if the bonus pushes an employee into a higher tax bracket.
- Open communication and consultation build trust and help maintain morale and productivity, even if the news is disappointing. Employees will appreciate honesty and clarity, especially if you’re facing financial difficulties.
How we can help
If an employee believes they are contractually or customarily entitled to a bonus and you fail to pay it, they may cry “unfair labour practice” and take the matter to the CCMA (Commission for Conciliation, Mediation and Arbitration).
If you’re uncertain about your obligations or if you anticipate disputes, we’re here to help. We can review your employment contracts, assess past practices, and provide guidance on how to manage employee expectations legally and fairly.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
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