Cassation File No. 246670

Cassation File No. 246670

Date: December 7, 2023 (Hidar 28, 2016 E.C.)

Judges:

Teferi Gebru (PhD)

Endashaw Adane

Teshome Shiferaw

Wazimo Wasira

Senait Adenew

Applicant: Tsehay Insurance S.C. (Represented by Attorney Habtamu Wondwosen)

Respondents:

1. Michael Girma Nigatu

2. Hiwot Molla Abebe

3. Emebet Goshu Beyene

4. Ephrem Mekasha Abebe

5. Netsanet Yibeltal Assefa

6. Mina Atlaw Melke

7. Naol Melkamu Desalegn (Represented by Getnet Salew)

8. Noah Tadele Berhe

9. Bethlehem Temesgen Birru

10. Samrawit Gebre-Egziabher

11. Abeje Girmay Yohannes

12. Bereket Zewdu Mamo

13. Yibeltal Atnafu

The file has been examined and the following judgment is hereby rendered.

JUDGMENT

The subject of this dispute concerns the conditions under which a labor bonus (gratuity) is payable. The litigation originated in the Federal First Instance Court, where the Respondents appeared as Plaintiffs and the Applicant as the Defendant.

In their statement of claim filed on November 24, 2022 (Hidar 15, 2015 E.C.), the Respondents alleged that while they were employed in various positions by the Applicant, they voluntarily resigned on various dates between May and August 2022 (Ginbot to Nehasie 2014 E.C.). They contended that the Applicant organization paid bonuses to employees who contributed to the profits earned during the 2014 E.C. fiscal year. The Respondents argued that despite having contributed to the fiscal year’s performance with good results, the Applicant refused to pay them bonuses. Consequently, they sought a court order for the payment of the bonus and a penalty for late payment pursuant to Article 38 of Proclamation No. 1156/2019 (2011 E.C.).

The Applicant filed a statement of defense on December 6, 2022 (Hidar 27, 2015 E.C.), arguing that bonus payments are governed by the employer’s internal regulations/directives rather than being a mandatory obligation under the Labour Proclamation. According to the organization’s directive, bonuses are essentially payable only to active employees and not to those who have resigned, as the purpose of a bonus is to incentivize current staff. Furthermore, the Applicant argued that the 4th and 8th Respondents had committed disciplinary infractions and were ineligible; the 6th Respondent’s bonus should be reduced by half due to disciplinary issues; and the 3rd, 5th, and 7th Respondents resigned before the end of the fiscal year. The Applicant also contested the claim for late payment penalties.

The Federal First Instance Court, after examining the arguments and evidence, found that according to the Applicant’s “Bonus and Salary Increment Implementation Directive,” an employee must be on active duty at the time the bonus is implemented to be eligible. Since it was undisputed that the Respondents were not in active service at the time of implementation, and noting that bonuses are discretionary payments governed by the employer’s internal rules, the Court dismissed the Respondents’ claim.

Aggrieved by this decision, the Respondents appealed to the Federal High Court. The High Court reversed the lower court’s decision, reasoning that since the Respondents served the Applicant during the 2014 E.C. fiscal year and contributed to its success, they should not be denied the bonus, which serves as recognition for past performance. The High Court further held that since the directive was approved on August 26, 2022 (Nehasie 20, 2014 E.C.), it should apply prospectively to the next fiscal year and not retroactively to the 2014 E.C. fiscal year. Thus, it ordered the Applicant to pay the bonus based on their period of service. The present cassation petition was filed to challenge this ruling.

In the petition filed on May 11, 2023 (Ginbot 3, 2015 E.C.), the Applicant argued that its Board of Directors issued a Bonus and Salary Increment Implementation Directive effective from August 26, 2022 (Nehasie 20, 2014 E.C.). Article 10 of this directive explicitly states that any employee or officer is eligible for a bonus or increment only if they are on active duty at the time of implementation. The Applicant cited binding legal interpretations from the Federal Supreme Court Cassation Bench in File No. 202839 (dated December 6, 2021) and Vol. 11, File No. 64758. The Applicant contended that since the Respondents were not employees when the bonus was implemented, the High Court committed a fundamental error of law by reversing the First Instance Court’s decision.

This Bench admitted the petition to determine whether the High Court erred in ruling that the August 2022 directive cannot apply retroactively to the 2014 E.C. fiscal year. The Respondents filed a response on October 9, 2023 (Meskerem 29, 2016 E.C.), arguing that there was no valid directive approved on August 26, 2022, and even if such a document existed, it was intended solely to deny them their payments. They requested the Cassation Bench to uphold the High Court’s decision. The Applicant filed a focalized reply on October 17, 2023 (Tikemt 7, 2016 E.C.).

This Bench has examined the file, the arguments of both parties, and the relevant legal provisions. The core of the dispute is whether employees whose contracts were terminated are eligible for a bonus implementation based on a directive that requires active employment status at the time of payment.

Under Article 53(2)(c) of Proclamation No. 1156/2019, a bonus is recognized as a form of payment from an employer to an employee. Unless otherwise stipulated in a collective agreement, a bonus is a discretionary gratuity granted by the employer rather than a mandatory legal obligation. Consequently, the employer has the right to determine through directives, regulations, or minutes who is eligible, the timing of payment, and the conditions for implementation.

Because a bonus is a discretionary benefit, its enforcement is not governed by the “minimum standards” established for mandatory labor rights in the Proclamation. Furthermore, bonuses are typically based on profits attained during a fiscal year, which can only be determined at the end of said year. Therefore, it is natural for an employer to issue a directive or decision regarding bonus distribution at the close of the fiscal year. In such cases, the principle of non-retroactivity of laws does not apply in the same manner as it would to statutory rights.

In this case, the Applicant’s directive clearly stipulates that to be eligible for a bonus, an employee must be in active service at the time the bonus is implemented. It is undisputed that the Respondents had already left the organization when the bonus was implemented. This Bench has previously provided a binding legal interpretation in File No. 202839, establishing that where an employer’s directive or authorized decision limits bonus eligibility to those currently in service at the time of implementation, such a condition is valid regardless of whether the decision was made at the end of the fiscal year.

The Federal High Court’s reasoning—that the directive was “retroactive” and therefore inapplicable—failed to consider the discretionary nature of bonuses and ignored the binding precedent of this Cassation Bench. Consequently, the High Court committed a fundamental error of law.

DECISION

1. The decision of the Federal High Court under File No. 302574, dated April 11, 2023 (Miazia 3, 2015 E.C.), is hereby REVERSED pursuant to Civil Procedure Code Article 348 and the Federal Supreme Court Cassation Procedure Directive No. 17/2023 Article 9(1)(b).

2. It is adjudged that the Applicant is NOT liable to pay bonuses to the Respondents.

3. Each party shall bear their own costs and expenses incurred during this litigation.

4. The stay of execution order issued by the Cassation Bench on May 29, 2023 (Ginbot 21, 2015 E.C.) is hereby lifted.

The file is closed and returned to the registry.

(Signature of Five Judges)