Understanding Bonuses in Employment Law

Beyond the Wage: The Nature and Conditions of Bonus Payments

Bonuses, often seen as a reward for performance or profitability, stand apart from regular wages in the landscape of labour law. Unlike a guaranteed salary, the payment of a bonus is typically at the discretion of the employer, subject to internal policies, collective agreements, and specific conditions. This inherent discretionary nature frequently leads to disputes, particularly when employees leave service before a bonus is disbursed, or when employers’ internal rules clash with an employee’s expectations or perceived contributions.

This chapter delves into the nuanced legal character of bonuses and the conditions governing their payment in Ethiopian labour law. We will meticulously analyze key decisions from the Federal Supreme Court Cassation Bench, primarily focusing on Tsion Moges v. Hibret Insurance S.C., Cassation File No. 227692, dated November 27, 2015 E.C., Ato Alehubel Tigale v. Hibret Insurance S.C., Cassation File No. 227697, dated November 27, 2015 E.C., Ato Solomon Assefa v. Buna Insurance S.C., Cassation File No. 228104, dated November 28, 2014 E.C., Ato Zerihun Admasu v. NIB International Bank S.C., Cassation File No. 236838, dated October 5, 2016 E.C., and Sheger Mass Transport Service Enterprise v. Sheger Mass Transport Service Enterprise Basic Labour Union, Cassation File No. 228985, dated October 30, 2015 E.C.. We will also briefly examine Gezahagn Beyene et al. v. Ethiopian Electric Service, Cassation File No. 226272, dated October 30, 2015 E.C., which concerns “incentive payments” to retired employees. These rulings collectively define the legal nature of bonuses, the supremacy of employer policies, and the judicial approach to interpreting conflicting precedents and internal regulations.

Key Legal Principles Governing Bonus Payments

The Ethiopian Labour Proclamation No. 1156/2011 (“the Proclamation”) and various Cassation Bench interpretations define the framework for bonuses:

1. Bonus is Not Part of Wage and is Discretionary

Article 53(2)(c) of Proclamation No. 1156/2011 explicitly states that a bonus (ጉርሻ) is not considered part of an employee’s wage. This is a fundamental distinction. Since the Proclamation does not provide detailed provisions on bonus payments, the discretion to pay a bonus, the conditions for its payment, and its method of calculation are generally left to the employer.

• Employer’s Discretion: Unless otherwise stipulated in a collective agreement, the employer has the inherent right to decide whether to pay a bonus, and to set the preconditions for its payment and distribution. This was a consistent finding across cases like Tsion Moges, Ato Alehubel Tigale, and Ato Solomon Assefa.

2. Supremacy and Applicability of Employer’s Internal Policies

When the Labour Proclamation is silent on specific matters like bonuses, the employer’s internal policies, work rules, or board decisions regarding bonus payments become legally binding and enforceable.

• Explicit Conditions: If an employer’s Human Resources Management Policy or a Board decision clearly states conditions under which a bonus is not payable (e.g., if an employee leaves service before the bonus is disbursed), these conditions are legally valid.
• “In-Service” Condition: A common condition, as seen in the Hibret Insurance cases (Tsion Moges and Ato Alehubel Tigale) and NIB International Bank (Ato Zerihun Admasu), is that a bonus is only payable to employees who are in service at the time the bonus payment is approved or disbursed. Even if an employee contributed to the profitability that led to the bonus, if they left service before the specified payment date, they may forfeit their right to it. This applies to employees who resigned or were terminated before the bonus payment.
• Internal Regulations vs. General Principles: While earlier Cassation decisions (e.g., Cassation File Nos. 20869 and 101825) had suggested that bonuses should be paid for past contributions even if an employee leaves, later mandatory interpretations (e.g., Cassation File No. 202839) clarified that this applies unless there is a clear condition in a collective agreement or an employer’s valid internal policy stating otherwise. When such a clear internal policy exists, it prevails.

3. Bonus Linked to Performance and Board Decisions

In some organizations, especially public enterprises, bonus payments and salary increments may be tied to the organization’s performance and require a formal board resolution.

• Board Approval as Precondition: As highlighted in Sheger Mass Transport Service Enterprise v. Sheger Mass Transport Service Enterprise Basic Labour Union (Cassation File No. 228985), if a collective agreement stipulates that salary increments (እርከን) or bonuses are contingent on the board’s evaluation of the organization’s performance and the board’s formal decision, then these payments cannot be demanded without such a board resolution. Achieving a certain performance target alone (e.g., 80% or 90% plan achievement) does not automatically trigger payment; the board’s subsequent approval is a necessary precondition.
• Interpretation of Collective Agreements: Courts have the power to interpret collective agreements. If the wording of an agreement makes board approval a clear precondition for payment, courts will uphold this. A dissenting opinion in the Sheger Mass Transport case suggested that performance-based increments should not require board approval, but the majority decision underscored the specific wording of the collective agreement.

4. “Incentive Payments” for Retired Employees

The legal nature of an “incentive payment” (ማትጊያ ክፍያ) can sometimes overlap with a bonus.

• Purpose of Payment: As clarified in Gezahagn Beyene et al. v. Ethiopian Electric Service (Cassation File No. 226272), even if a payment is termed “incentive,” if its underlying purpose and conditions align with that of a bonus (e.g., tied to organizational profitability and performance for those currently in service), then bonus principles apply.
• Exclusion of Retired Employees: If a collective agreement or internal policy specifies that a bonus/incentive payment is for employees “in service at the time of payment,” then retired employees, even if they contributed to the performance that generated the bonus, will not be entitled to it if they are no longer actively employed when the payment is disbursed.

Case Studies in Detail

Case 1: Bonus Eligibility for Employees Who Left Service (Tsion Moges v. Hibret Insurance S.C. – Cassation File No. 227692 & Ato Alehubel Tigale v. Hibret Insurance S.C. – Cassation File No. 227697)

Background: Tsion Moges and Ato Alehubel Tigale, former employees of Hibret Insurance S.C., sought bonus payments for a profitable fiscal year, arguing they contributed to the company’s success. However, they had both left the company before the bonus payments were disbursed. Hibret Insurance cited its HR Management Policy, Article 7.2.6, which explicitly stated that employees who leave the company before bonus payments are made are not eligible.

Federal Cassation Bench Ruling (for both cases): The Court upheld the decisions of the lower courts, denying the bonus claims.

• It affirmed that a bonus is not a wage (Article 53(2)(c)).
• It clarified that an employer has the right to set conditions for bonus payment.
• It reconciled seemingly conflicting past Cassation rulings by affirming that while bonuses are generally for past contributions, this principle is superseded if the employer has a clear, pre-existing internal policy or collective agreement that specifies conditions for payment, such as being in service at the time of disbursement.
• Since Tsion Moges and Ato Alehubel left before the bonus was paid, they did not meet the company’s stated condition and thus had no right to the bonus.

Case 2: Final Warning and Bonus Eligibility (Ato Zerihun Admasu v. NIB International Bank S.C. – Cassation File No. 236838)

Background: Ato Zerihun Admasu, a former employee of NIB International Bank, claimed a 2013 E.C. bonus. The Bank argued he was not eligible because its bonus policy (2013 E.C.) stated that employees who received a final warning during the bonus year, or who left service before the bonus was disbursed, were not eligible. Ato Zerihun had received a final warning and had left the bank before the bonus payment.

Federal Cassation Bench Ruling: The Court affirmed the lower courts’ decision to deny the bonus.

• It reiterated that bonuses are not wages (Article 53(2)(c)) and that employers can set conditions for payment.
• The Court found that the Bank’s internal policy clearly excluded employees who had received a final warning or left service before payment. Since Ato Zerihun met both exclusion criteria, the Bank was not obligated to pay him the bonus.
• The fact that the final warning was for a prior year’s offense did not alter the applicability of the bonus policy for the current year, as the policy itself linked eligibility to the issuance of the warning during the bonus year.

Case 3: Board Approval for Increments and Bonuses (Sheger Mass Transport Service Enterprise v. Sheger Mass Transport Service Enterprise Basic Labour Union – Cassation File No. 228985)

Background: The labour union claimed that Sheger Mass Transport Enterprise should pay salary increments (እርከን) and bonuses for the 2013 E.C. budget year, as the company had achieved its performance targets (over 80% for increments, over 90% for bonuses) as per the collective agreement. The Enterprise argued that its Board of Management had decided against payment, citing its authority as per the collective agreement.

Federal Cassation Bench Ruling: The majority of the Cassation Bench overturned the lower courts’ decision that had ordered payment.

• The Court meticulously interpreted Articles 20 and 21 of the collective agreement. It found that for both salary increments (Article 20.1 & 20.2) and bonuses (Article 21.1), the decision of the Board of Management was a necessary precondition.
• Achieving performance targets (e.g., 90% for bonus) merely indicated that the company was eligible to consider paying a bonus, but it did not automatically trigger the payment without the Board’s explicit resolution.
• Since the Board had decided against the payments, the conditions for disbursement were not met.
• A dissenting opinion argued that performance-based increments (Article 20.2) should not require Board approval, but the majority upheld the clear wording of the agreement making Board approval paramount.

Case 4: Incentive Payments for Retired Employees (Gezahagn Beyene et al. v. Ethiopian Electric Service – Cassation File No. 226272)

Background: Seven retired employees of Ethiopian Electric Service claimed a 2012 E.C. budget year “incentive payment” (ማትጊያ ክፍያ) that the Service paid to current employees. They argued they contributed to the performance of that year. The Service claimed the payment was for current employees to incentivize future performance.

Federal Cassation Bench Ruling: The Court affirmed the High Court’s decision to deny the payment to the retired employees.

• It characterized the payment as a “bonus” despite its “incentive” label, based on its nature (tied to annual performance and profitability).
• The Court relied on Article 16.7.2(a) of the collective agreement, which specified that bonus payments were for employees “who were in service during the budget year and are still in service at the time of payment.”
• Since the applicants were retired when the bonus was disbursed, they did not meet the “in service at the time of payment” condition, and thus were not entitled to the bonus.

Conclusion and Enduring Lessons

The collective rulings on bonus payments by the Federal Supreme Court Cassation Bench establish crucial principles in Ethiopian labour law:

• Bonus is Discretionary, Not a Right: A bonus is generally a gratuitous payment from the employer, not a legally mandated wage, unless explicitly made so by collective agreement or contract.
• Employer Policy is Supreme (within Legal Bounds): When the Labour Proclamation is silent, the employer’s internal policies, work rules, and Board decisions regarding bonus conditions (e.g., being in service at the time of payment, performance metrics, lack of disciplinary warnings) are legally enforceable.
• Conditions Must Be Met: Employees must satisfy all stated conditions in the employer’s policy or collective agreement to be eligible for a bonus. Leaving service before the disbursement date or receiving disciplinary warnings can lead to forfeiture.
• Clarity in Collective Agreements: Collective agreements must be clear on whether board approval is a prerequisite for performance-based payments, as this significantly impacts enforceability.
• Purpose-Driven Payments: The actual purpose of a payment (e.g., rewarding past performance vs. incentivizing future work) determines its legal character and eligibility rules.

These decisions provide clarity for both employers and employees on the legal landscape surrounding bonuses, emphasizing the importance of clear communication, well-defined internal policies, and understanding the specific conditions that govern these often-anticipated rewards.