When is a bonus not a bonus?

Bonuses are often misunderstood by both employees and employers.  Recent case law prompts a topical discussion as to the entitlement – or not – that staff really have to this benefit.

As South Africans settle back into a normal working rhythm after the numerous April and May public holidays – not entirely unlike Britain’s Bank Holidays or America’s summer slowdown – a familiar workplace question begins surfacing again:  ‘Are we getting a year-end bonus?’

For many employees, an annual December payment feels woven into the rhythm of working life.  In some companies, bonuses arrive with such consistency that employees mentally treat them as part of their annual income. In others, they appear irregularly and unexpectedly.  Yet despite how common bonuses are, many people do not fully understand how they function legally, or financially.

According to Cliffe Dekker Hofmeyr (CDH), South African law does not provide any automatic statutory right to a year-end bonus.  Employees are therefore not automatically entitled to a ’13th cheque’ unless something else creates that right, such as:

• a contract of employment;
• a collective agreement;
• a formal company policy; or
• in some circumstances, a binding past practice.

That principle was reaffirmed in UIS Analytical Services (Pty) Ltd vs Independent Democratic Union of South Africa and Others (2025), where the Labour Court confirmed that employees had no contractual or
policy-based right to a bonus, and that the union was therefore entitled to strike lawfully in pursuit of one.

But while the legal distinction may appear straightforward, the practical reality is often more complicated.

Two types of bonus schemes

Although companies use many different forms of incentive structures, labour law broadly separates bonuses into two categories: guaranteed bonuses and discretionary bonuses.

A guaranteed bonus is typically contractual.  Sometimes referred to as a ’13th cheque’, it exists where the right to payment is clearly established in an employment contract, collective agreement, or binding policy.

If a contract states that an employee will receive a bonus, the employer is generally obliged to pay it, subject only to any stated conditions – for example, that the employee remains employed on the payment date.  These are enforceable rights rather than optional rewards.

A discretionary bonus operates differently.  Here, the employer retains flexibility to consider factors such as:

• company profitability;
• broader economic conditions;
• individual performance;
• team performance; and
• commercial affordability.

Even then, discretion is not entirely unlimited.  South African labour law still expects employers to exercise discretion fairly and consistently rather than arbitrarily.  Crucially, however, a discretionary bonus does not automatically create a legal entitlement.

In the UIS Analytical case, employee contracts explicitly stated that the employer had ‘no legal obligation’ to pay bonuses and that any payment remained subject to the employer’s ‘exclusive discretion’.  The Court therefore found that employees had only a bargaining demand rather than an enforceable legal right.

Why bonus disputes arise so frequently

One reason bonus disputes become emotionally charged is because recurring bonuses often begin to feel permanent, even when legally discretionary.

Behavioural finance research has long shown that people quickly adapt their spending patterns around expected income.  Once bonuses become part of household budgeting – helping pay school fees, settle debt, fund holidays or support annual savings goals – employees may psychologically experience the absence of a bonus as a reduction in income, even where no contractual entitlement exists.

This gap between legal reality and financial expectation is increasingly important in modern workplaces.

Globally, employers have shifted steadily toward more variable remuneration structures.  Many businesses prefer flexible incentive systems because they reduce fixed long-term salary obligations during uncertain economic periods.

Human resources and remuneration specialists often distinguish between several different forms of bonus structures, including:

• retention bonuses;
• performance bonuses;
• profit-share incentives;
• discretionary recognition awards; and
• guaranteed annual payments.

Each serves a different commercial purpose.  Some are designed to reward productivity, others to retain key employees, while some simply provide employers with flexibility during volatile economic cycles.

In South Africa’s slower-growth environment, many employers increasingly favour discretionary incentive models precisely because they avoid creating fixed obligations that may become financially difficult during downturns.

Why contract wording matters more than many employees realise

One practical lesson emerging from cases like this is that employees often focus heavily on headline salary figures during recruitment negotiations while paying relatively little attention to how bonuses are structured.  Yet over time, the wording surrounding variable remuneration can materially affect financial predictability.

Employees negotiating employment contracts may benefit from focusing less on whether a bonus exists and more on how the bonus framework is defined.  Clearer wording can still preserve employer flexibility while improving transparency and predictability for employees.  This may include:

• defining measurable performance criteria;
• clarifying whether bonuses depend on company profitability, individual performance, or both;
• specifying review periods and payment timing;
• clarifying whether prior bonus history influences future expectations; and
• distinguishing carefully between ‘discretionary consideration’ and ‘guaranteed entitlement’.

In practice, many disputes arise because the boundaries of that discretion were never clearly communicated, and not because employees misunderstand the existence of discretion.

Why this matters from a planning perspective

Whether a bonus be contractual or at the behest of an employer, the issue of any bonus extends beyond its legal definition.  As has been referenced in the article  ‘Money isn’t the point…’  bonuses, whether discretionary or contractual should form an important part of anyone’s financial plan.  As much as possible of the bonus should be allocated to one or more of the following, preferably in this order of priority:

• debt reduction;
• AVC’s – Additional Voluntary Contributions – particularly when this can be tax deductible;
• discretionary long-term savings;
• school fees and/or emergency savings;
• major annual expenses.

As remuneration structures become progressively more variable and performance linked, discretionary income remains inherently uncertain.  This creates an important planning challenge for an employee in a modern employment environment.

For both employers and employees, the real lesson is likely less about whether bonuses will be paid or not, and more about communication, ensuring expectations, obligations and financial assumptions are clearly understood long before any dispute arises, and hopefully before any overseas trips are booked…