The limits of an employer's discretion over annual bonuses

The facts

Wu joined a clothing company in March 2014 as an administrative employee with a monthly salary of 6,000 yuan. In February 2019 the company told him that, because he had quarrelled with a colleague, it had decided not to pay him the annual bonus for 2018. Wu objected and in April 2019 applied to an arbitration commission, claiming 6,000 yuan as his 2018 annual bonus.

The parties' positions

Wu said that the employment contract said nothing about an annual bonus, but that the company's staff handbook provided for the bonus to be paid before the Spring Festival each year and for the company to have the right to make bonus appraisal rules and to appraise its employees. In practice, however, the company had never issued any appraisal rules and carried out no appraisal; by custom it paid one month's salary as a bonus before each Spring Festival. Every other employee had now been paid the 2018 bonus and he alone had received nothing, and he therefore applied for arbitration.

The company said that an annual bonus fell within the category of bonuses and was not part of an employee's salary; the employment contract did not provide for it and the law laid down no mandatory rule on the subject. Although the company had paid a bonus every year, whether and how to pay it was for the company to decide having regard to an employee's performance, and the staff handbook likewise provided that the company had the right to decide how the bonus was paid. Wu had quarrelled with his superior in December 2018 with a poor effect, and the company had accordingly decided not to pay the 2018 bonus. The company produced two pieces of evidence: the 2018 bonus appraisal results and a written statement from an employee. The appraisal results set out the bonus payable to every employee; the figure in Wu's row was zero, while every other employee had a corresponding amount. The written statement was an account by Wu's superior, Dong: that on 18 December 2018 Wu had had a verbal dispute with him at work, damaging the office environment and adversely affecting other employees.

Wu rejected both documents, saying that they had been produced unilaterally by the company and that he had never seen them, and that Dong's account was also untrue. That day Dong had raised a number of proposed changes to a trade union activity plan drafted by Wu, and although Wu revised it repeatedly it still did not satisfy Dong, who reprimanded him in the office; Wu had merely said a few words in his own defence and had not quarrelled with Dong.

The issue

Does the clothing company have the power to decide for itself whether to pay an annual bonus?

The award

The arbitration tribunal held as follows. The employment contract did not provide for an annual bonus, and the staff handbook gave the company the right to make bonus appraisal rules, but the company produced no appraisal rules for 2018, and its assertion that Wu had quarrelled with his superior rested on a single written statement which, as the only evidence, was of insufficient probative value and, Wu having denied it, could not establish that the account was true. The company's defence therefore lacked evidential support and could not stand. Having regard to the parties' practice of paying bonuses in previous years, the commission upheld Wu's claim.

Commentary

In the general understanding, an annual bonus is paid as a lump sum around the lunar Spring Festival of the following year, is not included in the monthly salary, and is meant to reward good performance over the past year and to encourage performance in the year to come. In practice, however, only a minority of employment contracts provide for it, because employees tend to assume that where a company has a practice of paying a bonus everyone will receive one and do not press for it to be written into the contract, while employers take the view that payment is for them alone to decide and need not be agreed in the contract. The result is that most disputes over annual bonuses have no written agreement to go on.

Where there is no written agreement, payment of an annual bonus falls within the employer's own management, that is, the employer may decide for itself the conditions, amount, timing and scope of payment. That is not to say, however, that its discretion is unlimited. Once an employer has laid down bonus rules in its internal regulations through a democratic procedure and published them to employees — and, since a bonus touches employees' vital interests, the rules must be made in accordance with Article 4 of the Labor Contract Law — those rules bind both sides. In short, the initiative lies with the employer, which has the power to set the rules lawfully within the framework of its internal regulations and to carry out the reviews and appraisals that applying them involves, but it may not depart from, discard or change the rules at will.

But does the absence of rules leave the employer free to do as it pleases? Probably not. The general applicability of an annual bonus makes it an important marker of equal pay for equal work; where there are no payment rules, arbitration and judicial bodies will pay attention to past practice and will examine whether the arrangements for the year treat employees alike, so that an employer wishing to pay one employee nothing, or less, has little room to manoeuvre and may readily be seen as discriminating in its employment.

In this case the parties had no written agreement on the bonus and the company proved no basis for the bonuses paid in earlier years, so that, being a relatively fixed sum, the bonus was closer to bonus-type income without conditions attached; but the power conferred by the staff handbook to make bonus appraisal rules and to appraise employees was not lost by reason of past practice. Unfortunately the company still produced no appraisal rules for 2018. With no skin, where can the hair be attached? The company departed from the rules it had set itself, and that also left its appraisal results without any logical connection, so that they came to nothing.

The company's real reason for withholding the bonus was the quarrel between Wu and his superior at work, but with no other evidence to corroborate it Dong's written statement was of the same probative value as a party's own account and, Wu having denied it, as the only evidence it could not establish the facts in issue. This ground of the company's case therefore also fails.

Lessons from the case

Bonus rules sometimes look like a rope binding an employer's hands and restricting its freedom somewhat, but just as clear, reasonable and strictly applied internal regulations make management efficient, so payment rules also amplify the incentive effect of an annual bonus, guiding employees to work hard and to strive for an extra reward they can look forward to, and so better serve the employer's interests.