Frequently Asked Questions about Staff Bonuses
Is the staff bonus issue giving you a headache? Often, employees can be of the opinion that they have a right to be paid an end-of-year bonus. Here, we answer some frequently asked questions about staff bonuses…
What does the law say about the payment of bonuses?
There are no statutory requirements which dictate that employee bonuses must be paid, and any such bonus payments are not regulated by labour legislation. However, if a bonus payment is part of an employment contract or collective bargaining agreement, then you are legally obliged to pay up.
Is there a difference between a thirteenth cheque and a Christmas bonus?
Thirteenth cheques are equal to an employee’s gross monthly salary, and are taxed in full, at the employee’s marginal tax rate. Thirteenth cheques are usually guaranteed, via inclusion into an employee’s conditions of employment and, nowadays, are built into that employee’s total cost to company (CTC). Often, companies pay thirteenth cheques in December, but some companies pay out thirteenth cheques at other times during the year, for example, in the employee’s birthday month or at the end of the company’s tax year.
The Christmas bonus is a tradition originally rooted in the festive spirit. A Christmas bonus is considered to be a gratuity (a thank you for the hard work during the year). While the Christmas bonus and the thirteenth cheque can be one and the same thing, they don’t necessarily have to be. For example, a company may not offer thirteenth cheques but may pay out a discretionary bonus at the end of the year, or may offer a guaranteed end-of-year bonus, based on a stipulated percentage of the employee’s annual salary.
Am I obliged to pay staff bonuses?
Not necessarily; bonus payments can be at the boss’s discretion. This is known as a discretionary bonus, and is not part of a contract of agreement. In other words, the business owner or manager decides whether to make a bonus payment and how much it will be. However, if the payment of a bonus has become an established practice, non-payment can be construed as constituting a change in conditions of employment.
My employees have always received a staff bonus, but this year I cannot afford it – what should I do?
If discretionary bonuses have been paid for many years, an expectation of such is then created amongst employees. In situations where bonuses have become entrenched, employees will feel that they have the right to receive a bonus, in other words, they have come to consider it as a condition of employment. If the economic climate has resulted in a situation where you are unable to fulfil their expectations, be sure to inform your employees timeously that they will not be receiving a bonus, in order to avoid claims of unfair labour practice with respect to the provision of benefits.
Some employees work hard all year, while others are slackers – can I pay staff bonuses to some and not others?
You could consider paying performance bonuses rather than a thirteenth cheque. Performance bonuses are discretionary and are related to an individual employee’s performance and/or to the performance of a department or division or the company. In such cases, employees would be subject to a performance appraisal or performance review, in which their performance is benchmarked against specified company standards. Bonuses would be paid for work which consistently exceeds these standards. A performance bonus is usually based on a percentage of an employee’s annual salary. Performance bonuses can also be paid in a lump sum to a department which has performed well, and then split equally between members of that department, an approach which works well in collectivist cultures.
Can I reward my workers for their output?
A production bonus is a type of bonus in which employees or departments are remunerated for performance measured against targets, rather than company standards. Production bonuses work well in manufacturing or production settings.
Should I have a company bonus policy?
To avoid confusion, every company should have a company policy regulating the payment of bonuses. The company bonus policy should clearly state the terms and conditions under which any staff bonuses are paid. All employees should be made aware of the company bonus policy and a copy should be made available for them to keep.
Remember, bonuses are governed by the law of contract, not labour law. If a bonus is a contractual condition written into an employee’s contract of employment, or a contractual condition in a company policy, is part of an agreement with a collective bargaining council or has become a condition of employment through established practice, then the employer is obliged to pay. Failure to pay could constitute an unfair labour practice or even breach of contract.
Should I wish to implement a change in my company bonus policy, do I need to inform my staff?
In situations where bonuses have become entrenched, be aware that any unilateral decisions regarding changes in company bonus policy could constitute a change in the terms and conditions of employment. Staff should be consulted with regards to the rationale behind the change; should they not accept the change, it can be implemented, providing the rationale behind the change is sound and reasonable.
Can I split a bonus into two payments – say 50% in December and 50% in June?
Splitting payments into two, or even four, instalments is becoming increasingly popular and is known as a staggered bonus. Employees may have come to expect a full payment at the end of the year, in which case they need to be consulted and the rationale behind the staggered bonus needs to be fully explained to them. This should be done as early as possible, in order that they can accept the change and budget more accurately. Staggered bonuses have an added advantage of reducing staff turn-over.