The Law on Bonus Payments

Author: Donovan Cheah (Partner) with assistance from Natalie Ng (Intern) (Donovan & Ho)

www.dnh.com.my

As the year comes to an end, many companies are starting to offer bonuses to reward employees for achieving specific goals, or for overall good performance. However, bonuses are normally described as “discretionary”, which is understood to mean that the employer has a right to determine whether or not to grant a bonus that particular year, or how much bonus should be given.

The recent case of All Malayan Estates Staff Union v Revertex (Malaysia) Sdn Bhd gives an interesting perspective as to how a Company should exercise its discretion in granting bonus.

Facts:

1. The company paid bonus for the year 2014 to its employees.
2. This discretion to pay bonus was based on a performance appraisal of each employee conducted by their superior.
3. The Company decided to not award bonus to 10 employees including the complainants due to a low performance rating.
4. The Union brought an action against the Company on the ground of unfair labour practice with regards to the manner of exercising this discretion.

Findings:

The Industrial Court cited the case of Castlefield (Klang) Rubber Estate Plc. v All Malayan Staff Union [1985] 1 ILR 124 in deciding that when the company exercises its discretion to pay out bonus in the year of 2014, it should have done so in favour of all employees and not just some. In the Castlefield case, the Court held:

“In our opinion the correct interpretation of Article 49 is that the discretion is to be exercised as follows: (a) Whether or not to pay bonus; (b) if it is decided to pay, the discretion must be exercised in favour of all the employees, although the Company has the discretion to decide on the quantum payable to each employee dependent on the individual performance during the past year.”

In this case, the Company claimed that they did not pay bonus to the complainants because their performance rating was “4”. However, the evidence showed that other employees who had a performance rating of “4” were given bonuses.

The Court also considered that although the complainants were placed under the Below Target Performance category, no efforts by the Company were shown to place them in a performance improvement plan or to provide them with any additional training or to explain their weaknesses to them. The complainants were also not found to have any disciplinary issues which may have caused the complainants not to receive bonus for the year 2014.

The Court decided that the Company in its prerogative to exercise its discretion of bonus payment should be exercised fairly. Paying bonus to 20 out of 30 employees who had the same performance rating was, therefore, not a fairly exercised discretion by the Company. The discretion to not pay bonus for the year 2014 to the complainants tantamount to an unfair labour practice.

Commentary:

This case highlights the fact that the courts do have the power to examine whether employers have exercised their discretion fairly when deciding on matters like bonus payments. However, this case should not be taken to mean that employers must always grant bonus to all employees (even poor performers). An important key factor here was that some employees did not receive bonuses even though their performance rating was the same or similar to other employees who did receive bonuses.

In deciding the quantum of bonus payments (or whether to pay bonus at all), employers should therefore ensure that they treat all employees fairly. There should not be different criteria for bonus for employees within the same category as this could be an unfair labour practice.  If employers want to use performance ratings as a basis to pay bonuses, they should ensure that employees who receive the same “performance rating” are treated the same.

Employers might benefit from having a transparent bonus policy so employees can be aware of the factors that are taken into account in determining bonus.