With the end of the year fast approaching, employers are advised to start preparations and planning for their Annual Bonus payouts and Festive Season shut-down periods. These preparations might consist out of budgetary considerations, as well as ensuring that sufficient staffing levels are maintained to ensure operational requirements are met.
Most employers would have already determined the budgetary implications of their planned bonus payouts much earlier in the year during preparation of their Annual Budgets, best practice would be to cumulatively provision for this liability throughout the year within your payroll system, although there is an oft-overlooked aspect to how and when bonuses are paid to staff.
These aspects might include:
Whether bonuses will be paid before, after or at the same time as the normal monthly salaries, and the associated Tax implications to the staff, of when these bonuses are paid
Deadlines and capacity in the Payroll office during a shortened December salary month
Staff motivation and personal budgetary considerations
Aligned business rules to main agreements and industrial councils.
Let’s take a slightly more in-depth look into each of these points.
Timing of bonuses
Due to the fact that Bonus payouts are considered as Irregular Payments to staff from the perspective of calculating PAYE, the timing and manner in which bonuses are paid to staff might have some interesting and often unexpected consequences to staff. While staff salary, commission, fixed allowance and overtime payments are considered Regular in nature, and are thus Annualised and Averaged during the calculation of PAYE, Bonuses are added to employees’ Annualised earnings after the Averaging calculation has been applied. In scenarios where the Bonus payout happens prior to the employee receiving their expected Regular earnings for a given pay-interval, this will lead to the bonus being under-taxed. Upon pay-out of the employee’s Regular earnings, the short-taxation will automatically be rectified by Automated Payroll systems, and in essence over-deduct PAYE from their Normal monthly, fortnightly or weekly payslip. Bonuses being what they are, the employees would have quite likely spent the entire bonus on their Festive shopping, without taking into consideration this short-taxation, which would thus place the employees at great risk of not being able to meet their financial commitments. It would be wise to advise employees of these risks, or alternatively choose to pay the bonuses as part of their normal payslips, or should the employer so wish, as a separate bonus-run after their normal earnings had been paid.
Deadlines and Capacity in the payroll office
Another factor often overlooked, is the necessity to ensure that a shorter payroll month allows enough time for payroll-staff to meet their processing, reporting and statutory submission obligations. Staff and managers need to be made aware of the deadlines for claims and other payroll-related input being advanced, and of the necessity for these deadlines to be strictly adhered to, lest the risk for the payroll not being completed in time.
Staff motivation and budgetary considerations
While not always being at front of mind for most employers, deciding when to pay out salaries and/or bonuses prior to the Festive season can have a dramatic effect on the productivity and motivation for staff to perform at their optimal efficiency. Paying bonuses a few days before Christmas gives the staff very little time in which to finalise their shopping, which adds stress in the lives of employees. This stress may influence staff negatively, and in turn lead to resentment and frustration. Many companies are dependent on customers to meet their payment deadlines, to have the necessary financial reserves to make bonus payments possible, but where feasible, employers should make every effort of seeing their employees’ wishes and needs from a human/merciful perspective.
As with Bonus payouts, the effect of staff taking leave during the festive season should be done in accordance with the following main-principles in mind:
Financial impacts of Leave
Operational requirements and staffing
Let’s consider these:
Financial impacts of Leave
Many companies across South Africa have mandated shut-down periods over the Festive Season. For salaried employees, employers rarely have to concern themselves about financial implications of such shut-down periods. However, for Fortnightly and Weekly payrolls, consideration need to be given to the fact that employees need to be paid in advance for the time they are not at work. If unprepared, employers may quickly realise that this advance payment can have catastrophic effects on their cashflow and ability to meet their financial responsibilities. It is advised that enough financial reserves are accumulated during the year, by keeping a keen eye on monthly Leave Liability and Provision reports, and ensuring that these provisions are budgeted for and adhered to.
Operational requirements and staffing
Where the financial impact of shutdowns and/or mass-leave taking during the Festive Season are not a factor, another large consideration to be considered, is the ability for your business to remain operational during the Festive Leave season. Depending on the nature of your operations, the Festive season might actually be the busiest time of the year, and in a non-shutdown environment, management needs to ensure that staff be accommodated as much as humanly possible, while not placing the business and non-leave-taking staff members under unnecessary strain. Careful collaboration needs to happen between management and staff to ensure the effective planning of which employees will take leave, and when.
From the points we’ve raised in the article, it should become apparent that the Festive season can dramatically affect a business’s capacity to operate efficiently and meet financial obligations. But, with the necessary foresight and planning, there is no reason for these obligations to be more than a normal part of your annual operating model.
Should you need assistance in understanding the implications of the contents of this article, please do not hesitate to contact your payroll consultant for guidance.
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