Are companies liable by law to pay their employees bonuses?

Provided By Cliffe Dekker Hofmeyr

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By Gavin Stansfield

Topics Dispute Resolution | Labour Law

03 Dec 2018

The short answer: if payment of a bonus is a guaranteed right, either in terms of an employee’s contract of employment, an employer’s remuneration or bonus policy, or perhaps an industry regulated Bargaining Council Main Agreement, and the bonus is not dependent on the exercise of any discretion at the instance of the employer or the attainment of individual or company related performance objectives, then such a bonus should ordinarily be payable. Absent such a right, there is no legislation within South Africa which obliges employers to pay bonuses to its employees. Hence, the right must either be agreed at the time of contracting or bargained for, either individually or collectively, and subsequently agreed to.

Uncertainty regarding the payment of bonuses is usually far more prevalent in cases where the employer reserves for itself the exercise of a discretion as to whether a bonus should be paid at all, alternatively, the calculation and quantum thereof. Indeed, arguably the majority of bonus schemes are made subject to an employer’s discretion in assessing the extent to which an employee (or a team, department or the employer as a whole) may have achieved previously agreed upon deliverables giving rise to payment of a bonus or a portion thereof. In circumstances where employees may feel aggrieved by the manner in which an employer may have exercised such a discretion, the following constitutes a brief summary of the applicable guidelines in law which govern the exercise of an employer’s discretion.

It is now settled law that the payment of a performance bonus constitutes a “benefit” as contemplated by s186(2)(a) of the Labour Relations Act, 1995 (LRA), and the dicta in Apollo Tyres v Commission for Conciliation, Mediation and Arbitration and Others (2013) 34 ILJ 1120 (LAC) at para 47.

It is furthermore trite that in employment law terms, and under the auspices of the unfair labour practice jurisdiction, there is no such thing as an unfettered discretion; the exercise of the discretion must always be subject to being tested against basic tenets of fairness (see Solidarity obo K Oelofse v Armscor (SOC) Ltd & Others, case number JR 2004/15 at para 28). In Aucamp v SA Revenue Service (2014) 35 ILJ 1217 (LC) it was said:

“Even if a benefit is subject to conditions and the exercise of a discretion, an employee could still, as part of the unfair labour practice proceedings, seek to have instances where the employee then did not receive such benefit adjudicated. So therefore, even if the benefit is not a guaranteed contractual right per se, the employee could still claim same on the basis of an unfair labour practice if the employee could show that the employee was unfairly deprived of same. An example would be where an employer must exercise a discretion to decide if such benefit accrues to an employee, and exercises such discretion unfairly.”

In relation to the question of fairness, the court in National Coalition for Gay and Lesbian Equality and Others v Minister of Home Affairs and Others 2000 (2) SA 1 (CC) at para 11, held that the exercise of a discretion may be open to challenge if it:

“… had been influenced by wrong principles or a misdirection on the facts, or that it had reached a decision which in the result could not reasonably have been made by a court properly directing itself to all the relevant facts and principles.”

In Apollo Tyres the Court said the following in relation to fairness:

“… unfairness implies a failure to meet an objective standard and may be taken to include arbitrary, capricious or inconsistent conduct, whether negligent or intended.”

It follows that in those instances where an aggrieved employee wishes to challenge the exercise of an employer’s discretion in relation to the payment or calculation of a bonus, the employee would bear the onus of showing that the employer, in exercising such discretion, acted irrationally, capriciously, grossly unreasonably or mala fide. In those instances where an employer is found to have exercised its discretion inconsistently amongst different employees, or with a clear intention of favouring or prejudicing one employee over another, this would in all likelihood assist the aggrieved employee in the discharge of their onus.

Importantly, however, it has been found that even if an employer may have been wrong in interpreting and applying bonus criteria, this would not automatically result in a finding that the exercise of its discretion had been unfair (see Solidarity obo K Oelofse v Armscor (SOC) Ltd & Others at para 34). What is required to be shown, is proof of some form of behaviour on the part of the employer which meets the aforementioned test of irrational, capricious, grossly unreasonable or mala fide.

The misconception in retrenchment situations

Trumping Last In First Out – The misconception in retrenchment situations

Provided By VDMA Attorneys

Topics Labour Law

06 Dec 2018

Everyone knows about or has heard about the principle Last in First Out (“LIFO Principle”) in the context of a dismissal in terms of section 189 of the Labour Relations Act No. 66 of 1995 (“LRA”) (“Retrenchment”). There is a misconception in the workplace, among unions and Commissioners of the Commission for Conciliation, Mediation and Arbitration (“CCMA”) that the LIFO Principle should be strictly adhered to and complied with in the instance of a Retrenchment. However, there is no legal requirement that stipulates that the LIFO Principle must be followed, or that it is the only criterion to be followed in the case of Retrenchment. So, when does attendance and performance as a criterion trump the LIFO Principle?

Often in situations of Retrenchment, management is desirous to retrench employees who are deemed poor workers with bad attendance records, regardless of the amount of years they have been in service, but very often there is nothing to support their allegations of poor work performance and attendance.

In terms of section 189(7) of the LRA the employer must select employees to be retrenched based on a selection criterion, either agreed to by the consulting parties or in the absence of agreement, one which is fair and objective and applied as such.

A period of Retrenchment is an uncertain time for both the employer and employee and it is sensible on the part of the employer and in a company’s best interests, to retain productive and competent employees. However, this by no means allows an employer to use Retrenchment as a “spring cleaning” exercise in order to get rid of poor performers. Therefore, it is important for employers to maintain a record of performance, attendance and even disciplinary records. The employer should make an effort to ensure that the employee is at all times aware of his or her poor work performance and/or attendance and that these issues are addressed during the course of the employees’ employment. Furthermore, it is important that an employee is made aware that these factors may count against them in the instance that the company is ever in a situation of Retrenchment.

The criteria that management selects should be a blend. The LIFO Principle will become relevant and contentious when there are a number of employees, all doing the same job, who are interchangeable.

Restraint of Trade

Restraint of trade: What does it mean?

Provided By Abrahams & Gross

By Jeremy Simon & Wesley Scheepers

Topics Commercial & Corporate Law | Contract Law | Dispute Resolution | Labour Law

10 Dec 2018

The majority of employment contracts contain a restraint of trade clause. Many people merely consider it a standard clause but it can have serious implications for future employment.

The implications can be seen in the recent dispute between Pepkor (formerly Steinhoff Africa Retail) and Tekkie Town footwear. According to the Fin24 article: “Pepkor says it succeeded in demonstrating to the court that it has a protectable interest in terms of restraint of trade provisions that apply to the founders of Mr Tekkie.”

What is a restraint of trade clause?

A restraint of trade clause limits the ability of an employee to accept future employment which could be to the detriment of their current employer – usually because it is a competitor and the employee has access to confidential information.

When is restraint of trade unenforceable?

There are instances in which restraint of trade agreements are unenforceable. This is usually where it is proven that the contract was not understood by the employee or the application of the restraint of trade agreement is too broad.

The court stated in Reddy v Siemens [2006] SCA 164 that “the substantive law as laid down in Magna Alloys is that a restraint is enforceable unless it is shown to be unreasonable, which necessarily casts an onus on the person who seeks to escape it.” In determining the reasonableness the court considers public interest, which expects parties to comply with their contractual obligations, balanced against the interests of society allowing people to trade freely and be employed in the profession of their choice.

In that particular case, Reddy v Siemens, the court found that the restraint of trade agreement only prevented the employee from taking up employment at a competitor of Siemens – it did not prevent the employee from being employed, it merely limited the specific employer. The court also found that the employee had access to confidential information of the employer (Siemens) and whilst it is sufficient that he has the ability to disclose this confidential information, it is not required that he actually disclose this information. Accordingly the restraint of trade agreement was found to be valid and enforceable.

Determining the reasonableness of the restraint of trade clause

The courts also refer to the test as set out in Basson v Chilwan [1993] ZASCA 61, which asks four questions to determine the reasonableness of the restraint of trade agreement:

1. Does the one party have an interest that deserves protection at the termination of the employment?
2. If so, is that interest threatened/prejudiced by the other party?
3. Does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
4. Is there an aspect of public policy having nothing to do with the relationship between the parties, which requires that the restraint be maintained or rejected?

Protectable interest vs. the right to be economically active

Thus, where the interest of the party sought to be restrained outweighs the interest to be protected, the restraint is “unreasonable and consequently unenforceable” (Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another [2016] ZALCJHB 250). Accordingly, an employer must have a protectable interest and the threat of that interest being prejudiced must outweigh the employee’s right to be economically active.

What is protectable interest?

The protectable interest is usually the confidential information to which an employee is privilege and which can be divulged to competitors. The court set out in Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another the definition of confidential information:

“it must (a) be capable of application in trade or industry, must be useful; not be public knowledge or property; (b) it must be known only to a restricted number of people or a closed circle and (c) be of economic value to the person seeking to protect it.”

How is a restraint of trade agreement enforced?

The means by which to enforce a restraint of trade agreement is an interdict. If a final interdict is sought, three things need to be established: “there must be a clear right, secondly an injury actually committed or reasonably apprehended, and lastly, the absence of any other satisfactory remedy” (Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another).

Where an employee has access to confidential information and the ability to divulge that information, the first two requirements are met. Whether an alternative remedy is available considers the reasonableness of the restraint of trade agreement and the weighing up of the competing interests.

When is a restraint of trade unreasonable?

Courts have found restraint of trade agreements to be unreasonable in instances where they are too vague or too broad in their application. In Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another the court stated that “the restraint will be unreasonable if the duration and scope of area sought to be enforced falls outside of the agreement itself, and/or the restraint is broader than necessary.”

Advice for employers and employees

Accordingly, employers should ensure to draft restraint of trade agreements narrowly and only to the extent necessary to protect their protectable interests.

Similarly, employees should ensure they understand the extent and content of the restraint of trade agreement they enter into, as the onus is on the employee to prove its unreasonableness and thus its unenforceability.