Authored by: Ron Warren

Published: 2009/05/22 – Law24.com

Must an annual bonus be included in the calculation of leave pay?

I received the following query, which I think will be of general interest.

I had the pleasure of attending a Payroll manager’s seminar at Gallagher Estate yesterday which got me thinking that you might be able to help me with a very sticky situation I am finding myself in at the moment.

It has reference to section 21 and 35 of the Basic Conditions of Employment Act (“BCEA”).

The situation is that our payroll is outsourced and our January payroll included a line item called “BCEA leave taken” with x amount paid out to each employee who had taken leave in January 2009. When I enquired about this I was referred to these sections of the act and showed the calculations. Now what it comes down to is that they reckon you have to apply the calculations of the act even if you simply take leave, but stay employed with the company, something I have never heard of, as far as I am aware you only pay out leave once an employee leaves the employment of the company?

I know that a person is not supposed to be any worse off (in monetary values) if he/she takes leave versus if they don’t, so I can to an extent understand the situation of a person who earns overtime/commission and is actually used to having that additional revenue on a monthly basis, but it still does not make sense to me to be paying it out every time they just take leave. What makes it worse is that it was also applied to people like myself who earn a straight salary with a bonus once a year. Because I received a bonus in December and took leave in January I received an additional payment for leave taken calculated based on the bonus (bonus divided by 3 divided by 21.67 times the amount of days taken in January). The calculation I know, it is the principle of the matter that does not make sense at all.

Furthermore, the act speaks of guaranteed and discretionary bonuses, but describes a discretionary bonus as something that is not related to any hours worked or performance, in other words it is guaranteed if it is based on your performance, correct? Our letters of appointment clearly state that bonuses are to the discretion of the company, however we do set employees certain targets to achieve and do reviews twice a year to determine if they qualify for a bonus or not, the amount however, is to our discretion. So, the question at the back of all that, is if our bonuses should have been included in this calculation (should this calculation even have taken place?)

I would be very much appreciative if someone could shed some light on the matter as well as what is done in practice with this section.

I replied to the query in an abbreviated manner, but it strikes me that this is a problem that is probably faced by many employers. The matter of guaranteed and discretionary bonuses has been the subject of much discussion by labour lawyers, and the consensus of opinion seems to be that so called discretionary bonuses become “guaranteed” once they have been paid on a regular basis.

How annual leave should be paid for is dealt with comprehensively in the latest update to the Payroll Administrator’s Manual, which I edit and which is published by LexisNexis. I now quote from that manual, with a little bit of editing to get the context right.

How leave is to be paid for was specified by the Minister of Labour in a notice issued on 23 May 2003. The notice clearly sets out what must be included and excluded from “remuneration”, and in effect expands the definition of remuneration contained in the definitions section of the BCEA. The effect is to flesh out the bare bones of the definition, and remove any ambiguities in its interpretation.

Particular note should be taken of the fact that the schedule is applicable not just to payments on termination, but to payment for annual leave when it is taken. The remuneration of employees who earn overtime, commission or other fluctuating payments includes the average of those fluctuating payments over the 13 weeks prior to the leave being taken (or shorter period if they have not been employed for 13 weeks). It is this rate that must be used to pay for annual leave, and not just the “basic” rate of pay.

According to the Minister’s notice, payment for annual leave taken does not have to include the value of payments in kind that the employee continues to receive while on leave. Items such as pension or provident fund contributions and medical aid contributions will continue to be paid while the employee is on leave, and therefore do not require to be added to the leave pay.

However, the Minister’s notice makes the bald statement that the value of bonuses to which an employee is entitled must be included in leave pay, without excluding a normal annual bonus that an employee receives each year from the calculation of pay for leave taken, in the same way as continuing employer contributions are excluded. Such a payment is no different to a payment in kind that does not have to be included in the payment for annual leave. This is manifestly unfair to the employer, and is an oversight in the Minister’s notice.

It is my firm opinion that payment for leave taken should not be increased by the value of the annual bonus that will be paid to the employee at the normal bonus payment time. Labour law and regulations must be interpreted so as to give a fair result to both the employer and the employee, regardless of the strict legal interpretation of the actual wording.

When paying for days of accumulated leave not taken on termination of employment, however, the cost to the employer of all such payments in kind, as well as a pro rata portion of the normal annual bonus which the employee receives, will have to be arrived at and paid to the employee. This is because the employer will no longer be paying the pension/provident fund or medical aid contributions, and will also not be paying the normal annual bonus.