About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Johannesburg Labour Court, Johannesburg
SAFLII
>>
Databases
>>
South Africa: Johannesburg Labour Court, Johannesburg
>>
2019
>>
[2019] ZALCJHB 145
|
|
McCormack v COMMCO Holdings (Pty) Ltd (JS474/17) [2019] ZALCJHB 145 (29 March 2019)
the
labour court of South Africa, johannesburg
judgment
Not reportable
CASE
NO: JS 474/17
In
the matter between:
JAMES
McCORMACK
Applicant
and
COMMCO
HOLDINGS (PTY) LTD
Respondent
Trial:
25 -26 February 2019
Argued:
15 March 2019
Judgment
delivered: 29 March 2019
JUDGMENT
VAN NIEKERK J
[1]
The applicant was previously employed as the CEO of the respondent.
He seeks to enforce
a term of his contract of employment, which he
contends entitles him to payment of a performance bonus in the sum of
R 1.1 million.
The respondent does not dispute the term of the
contract, but contends that the applicant has failed to prove that
the performance
target that was a condition for payment of the bonus
was met. The respondent accordingly denies that it is indebted to the
applicant.
[2]
The applicant commenced employment with the respondent on 1 January
2014. In terms of his
contract of employment, the applicant was
entitled to payment of an annual performance bonus, provided that
certain conditions
were met. These are recorded in clause 3.4 of the
employment contract, which establishes the mechanism by which the
quantum of
the applicant’s performance bonus is to be
calculated. That clause (with the necessary changes to reflect an
agreed variation
to the terms of the contract to substitute EBITDA
(earnings before interest, tax, depreciation and amortization) for
profit before
tax (PBT), provides as follows:
3.4
Should the [EBITDA] in respect of any financial year not exceed 75%
of the targeted [EBITDA]
the applicable percentage in respect of that
year will be 0% and no bonus will be payable. Should the [EBITDA]
exceed 75%, but
not 85%, of the targeted [EBITDA] the applicable
percentage would be 50%. Should the [EBITDA] in respect of the
financial year
exceed 85%% of the targeted [EBITDA] the applicable
percentage is the same as that which the [EBITDA] for that year is of
the targeted
[EBITDA] for that year. By way of example, if the
[EBITDA] for the year is 95% of the target [EBITDA] the applicable
percentage
is 95% and the annual bonus will be calculated at 95% of
the basic salary for that year; if the [EBITDA] for the year is 120%
of
the targeted [EBITDA] the applicable percentage is 120% and the
annual bonus will be 120% of the basic salary for that year.
[3]
The present dispute concerns the 2016 financial year. Any bonus to
which the applicant
was entitled was contingent on the threshold of
75% established by clause 3.4 being met, to be calculated on the
sliding scale
referred to, and payable within three months of 30 June
2016, being the financial year end. The applicant left the
respondent’s
employ at the end of May 2016. It was agreed
between the parties that in so far as the applicant was entitled to a
performance
bonus for the 2016 financial year, the bonus would be
reduced by 1/12th.
[4]
Given that the applicant’s contract provided that he was
entitled to a bonus
depending on the respondent’s actual EBITDA
for the 2016 financial year compared with the budgeted or targeted
EBITDA for
the same year, the respondent contends that the applicant
bears the onus to establish both the respondent’s budgeted
EBITDA
for the 2016 financial year and the respondent’s actual
EBITDA for that year.
[5]
The applicant contends that the respondent bears the onus to prove
that the performance
target had not been met. In doing so, the
applicant relies on
Schloemann v Goldstone Resources Ltd
(C
658/16) [2018] ZALCCT 40 13 December 2018) in which this court (per
Steenkamp J) held that in a dispute about whether an employee
voluntarily resigned or had his contract terminated at the instance
of his employer, the applicant employee bore the onus to establish
the terms of the contract; the respondent bore the onus to prove an
agreement to terminate the employee’s contract. The court
referred to
Pillay v Krishna
1946 AD 951
(at 953) where the
court noted that the correct use of the word refers to the duty cast
on a particular litigant in satisfying
the court that he or she is
entitled to succeed on his or her claim or defence, as the case may
be. The nature of the defence raised
by the respondent (i.e. that the
condition on which the bonus became payable had not been met) is not
in the nature of any special
defence that may attract the onus of
proof. I accept however, on the basis of the distinction often drawn
between an onus of proof
and an evidentiary burden, that given the
negative allegation that forms the basis of the respondent’s
defence, it should
discharge the evidentiary burden of establishing
that as a matter of fact, at the relevant time, the agreed
performance target
had not been met, i.e. that the respondent’s
actual versus budgeted EBITDA did not exceed 75%. This is in any
event a matter
peculiarly within the knowledge of the respondent, and
given that this is the essence of the respondent’s case, it
should
be required to discharge an evidentiary burden to establish
that which it asserts. However, as I have indicated, the onus of
establishing
that the respondent is in breach of the employment
contract by refusing to pay the applicant a performance bonus rests
on the applicant.
[6]
The applicant’s case was built ultimately on supposition. He
testified
that in his view, the actual EBITDA for the 2016 financial
year was such that he was entitled to payment of a performance bonus.
In the main, and in the absence of any meaningful ability to state
what the actual EBITDA was at the time that bonuses for the
2016
financial year were calculated, he took issue with the 2016
management accounts, and the 2016 annual financial statements.
In
respect of the 2016 management accounts, in a comparison of year to
date figures as at the end of the quarter in which he left
the
respondent’s employ with those reflected at year-end, the
applicant took issue particularly with the difference of the
total
EBITDA of R4 472 283 for the third quarter (Q3) and the total EBITDA
reported for 2016, being R44 164. Further, the applicant
contested
the total projected income as per the management accounts, which he
contended did not match the income as reflected on
the respondent’s
VAT returns (the management accounts reflected a lesser income). The
applicant also queried a rental expense,
which differed from Q3 to
Q4, as well as the salaries expense, which differed in the same
quarters.
[7]
In relation to the 2016 financial statements, the applicant contended
that the statements
had not been audited and signed, and that there
was an anomaly in regard to the total loss of R4 821 664 for the 2016
financial
year, as opposed to the total profit of R5 004 001 for
2015. In particular, the applicant noted that the balance of ‘cash
and equivalents’ for 2015 (R9 618 906) had increased to R10 003
889 for the 2016 financial year, whereas a total loss of
R4 821 664
was reflected for the same year. Finally, the applicant contended
that by reference to amounts paid to other employees
as bonuses in
respect of the 2016 financial year, in his estimation, the
respondent’s EBITDA was at least 80% of budget,
and that he
thus qualified for payment of his bonus, the threshold being 75%.
[8]
Mr Muhammed Dalal gave evidence for the respondent. He is a chartered
accountant and
the respondent’s chief financial officer. Dalal
addressed himself to what the applicant had identified as anomalies
in the
2016 management accounts and financial statements, and
explained each in turn. He testified that the respondent’s
budgeted
EBITDA for the 2016 financial year was R4 453 512 and that
this figure included provision for salaries as an operating expense,
in an amount of R13 788 550. That figure represented the sum of
budgeted salaries (at R10 434 000) and a provision for bonuses
(for
the applicant and other members of staff) in an amount of R3 354 550.
This evidence was not seriously challenged, and was
supported by a
schedule submitted by Dalal. Also not seriously challenged was
Dalal’s evidence that the applicant was aware
of this figure,
since he and the applicant had prepared the 2016 EBITDA budget.
[9]
Dalal further testified that the revised actual EBITDA as reflected
in September 2016
was an amount of R 4 866 525.66, as opposed to an
adjusted budgeted EBITDA of R7 808 062.39. On this basis, 62% of the
budgeted
EBITDA had been achieved, and bonuses were calculated and
paid on this basis. The achievement of 62% of budget meant that in
the
applicant’s case, the trigger threshold of 75% was not met,
with the consequence that he did not qualify for a performance
bonus
for the 2016 financial year. Dalal testified that the schedule on
which he performed his calculations reflected a total revenue
for the
year of R40 508 423.60 and operating expenses of R42 409 072.84, i.e.
a loss of R1 900 649.24. After accounting for depreciation
and
amortization (R2 650 508.23 and R1 666 666.67 respectively), the
respondent’s EBITDA was reflected as R2 416 525.66.
That figure
accounted for the cost of salaries (as an operating expense)
but
excluded any provision for bonuses.
After adjustments in respect
of recoveries form associated entities, the total EBITDA was
calculated at R4 866 525.66. The
latter figure accounted for
salaries (as an operating expense), but not bonuses. Given that there
was no accounting in the total
EBITDA for bonuses, the budgeted
amount of R3 354 550 was added to the budgeted EBITDA to calculate a
revised budgeted EBITDA,
the total of R7 8908 062.39 referred to
above. To make available the EBITDA of R4 453 512.39 to shareholders,
it was necessary
to calculate what the respondent’s earnings
would have to be before bonuses were accounted for. That was achieved
by adding
the sum of R3 354 550 to the budgeted EBITDA, giving a
total of R7 808 062.39. In the schedule produced by Dalal, the figure
of
R3 354 550 is reflected as having been added to the budgeted
EBITDA of R4 453 512.39, to produce a total adjusted budgeted EBITDA
of R7 808 062.39. Another way to appreciate Dalal’s
explanation is by reference to the respondent’s budget for
the
2016 financial year. That reflects a total salary expense of R13 788
550, a figure that included provision for bonuses of R
3 354 550.
When the provision for bonuses is deducted from the total salaries
expense, the total projected operating expenses decrease
by that
amount, which in turn increases the EBITDA budget by the same amount.
That would raise the EBITDA budget from R4 453 512
to R7 808 062.
This is consistent with the 2015 EBITDA budget and actuals, where the
line item of salaries and thus the budgeted
EBITDA excludes provision
for bonuses.
[10]
Dalal also testified that he and other employees were paid bonuses
based on an actual versus budgeted
EBITDA of 62%. His interpretation
of their contracts (which are cast in different terms to that of the
applicant and provide for
payment of a performance bonus at a trigger
of 50% of annual budget target achieved), was that if the actual
EBITDA was more than
50% of the budgeted figure, then employees would
be paid to the extent of the relevant percentage. The applicant had
proffered
a different interpretation of the employees’
contracts, one that aligned more closely with his own contract, but
that is
not relevant for present purposes, since the interpretation
of those contracts or the quantum of the bonuses paid is not in
issue.
[11]
Dalal gave evidence of other incarnations of the respondent’s
actual EBITDA for the 2016
financial year. Beside those recorded
above, there was a presentation to the respondent’s board in
July 2016 in which an
actual EBITDA of R1 732 201 was recorded.
Dalal’s evidence was that this figure did not account for the
provision for the
payment of bonuses, and that it therefore had to be
reduced by R3 354 550 (the budgeted sum) so as to compare the actual
and budgeted
EBITDA. The last incarnation of the respondent’s
EBITDA for 2016 appears in the annual financial statements for 2016,
signed
by the auditors, reflecting a negative EBITDA of R 44 164.
Since employee bonuses were calculated on the EBITDA reflected as at
30 September 2016, as provided in their contracts of employment
(including that of the applicant) I need not consider the 2016
financial statements further. Dalal did not dispute under
cross-examination that those statements were not relevant given that
bonuses were calculated in September 2016. In re-examination, Dalal
made clear that the 2016 financial statements were relevant
to show
what the actual EBITDA for 2016, but as I have indicated, this is not
relevant for present purposes.
[12]
I have no reason to reject Dalal’s evidence. He gave evidence
confidently and with authority.
Although the applicant’s
counsel was critical of the fact that source documents were not made
available to the court, it
was open to the applicant to compel the
production of those documents. The documents that were included in
the bundle (which included
the budget, management accounts and
reviewed financial statements) were supportive of Dalal’s
evidence, at least in terms
of his analysis of them. As I have
indicated, there is no basis on which I can reject that analysis.
Dalal explained that items
such as EBITDA were the subject of
adjustment at various stages of the reporting process – in this
case, the July 2016 presentation
to the respondent’s board, the
September 2016 calculations for bonus purposes, the management
accounts and the annual financial
statements. Nothing sinister
was implied in respect of any of the adjustments that Dalal effected,
and as I have indicated,
he was able to explain each by reference to
the documents and reports concerned. The accounting practices adopted
by Dalal were
never challenged under cross-examination and I must
also accept that the accounts have been reviewed by an independent
auditor
who has not qualified or otherwise called the accounts into
question.
[13]
For the above reasons, I find that the respondent has discharged the
evidentiary burden of establishing
that the comparison of budgeted
and actual EBITDA for the 2016 financial year as at 30 September 2016
did not meet the 75% threshold
referred to in clause 3.3 of the
applicant’s contract for payment of an annual bonus. It follows
that the applicant has failed
to establish that the respondent
breached clause 3.3 of his employment contract when it refused to pay
him a performance bonus
for the 2016 annual financial year. The
applicant’s claim accordingly stands to be dismissed.
[14]
In terms of s 162 of the LRA, the court has a broad discretion to
make orders for costs according to
the requirements of the law and
fairness. In my view, these requirements are best satisfied by each
party bearing its own costs.
The court is ordinarily reluctant to
make orders for costs against individual employees who pursue
legitimately-felt grievances
against their employers in good faith.
This case is one of those. I must also take into account the conduct
of the respondent,
which made concessions regarding the basis on
which the applicant’s bonus was to be calculated late in the
day, and a refusal
to provide copies of documents requested, which
were produced under subpoena only three weeks prior to the
commencement of the
trial. This is not the manner in which parties to
disputes referred to this court ought to conduct themselves.
I make the following
order:
1.
The applicant’s claim is dismissed.
André van
Niekerk
Judge
REPRESENTATION
For
the applicant: Adv. L Erasmus instructed by Kirchmanns Inc.
For the respondent: Adv.
L Hollander instructed by Faber Goertz Ellis Austen Inc.