Connecticut Employment Law Blog Insight on Labor & Employment Developments for Connecticut Businesses

Retention Agreements: How the National Spotlight Now Shines on Connecticut’s Wage and Hour Laws

Posted in Wage & Hour

UPDATED

Various blogs have started to link to this one today after AIG released a white paper to support its assertion that it was required to make payments to various executives and employees over the last week.

It turns out that the retention plan at issue is to be construed under Connecticut’s wage and hour laws.  As bloggers and commentators will quickly realize, Connecticut doesn’t exactly have an litany of cases on which to base any type of legal analysis.  In some ways, it’s like trying to do a jigsaw puzzle with about 10 pieces. But that doesn’t mean that some parameters of the discussion haven’t been formed.

I can’t (and won’t) comment about the specific AIG plan or employee agreements because I haven’t seen them but I do want to briefly comment on some items of my prior posts to clarify a few things:

1) Any analysis of whether retention payments are "wages" is dependent on the language of the retention plan or agreement.

Without looking at the underlying plan and agreement, all the talk about whether a payments to be made under a retention plan are required to be made as "wages" (and subject to penalties if they aren’t made) is just speculation.  Connecticut wage laws courtesy morgue fileMAY apply to certain retention plans, but there are situations where certain payments to employees should not be considered "wages" but may more akin to fringe benefits (like unused vacation).  As I said back in December, whether something is a "wage" all depends on the language of the agreement between an employer and employee. 

2) Characterizing payments to employees as "bonuses" but not "wages" is really beside the point. Some bonuses can be considered wages (and therefore subject to Connecticut’s wage statutes when they are linked to services rendered) and some are not (see my discussion of a recent Connecticut Supreme Court case here). 

Instead, to determine whether a payment is a wage or not, courts look at the specifics of the agreement between an employer and employee (or the applicable plan) and determine if there is a link between an employee rending services and the payment.   The more that there is a link between an employee’s services and the payment by the company, the more likely that courts will view such payments as "wages" (and be subject to Connecticut’s wage and hour laws.) 

Retention agreements (or "stay bonuses" or "key employee agreements) have long been used by companies to provide incentives to employees to stay with a company, particularly when that company is going through a merger or bankruptcy, etc.  Much like any other contract, the ability to modify the contract is going to depend on the language of the agreement. And whether or not retention agreement payments are "wages" will depend on the contract itself.

But aside from the wage issue, there’s another theory underlying retention agreements — basic contract law.  Perhaps if you’re having difficulty understanding the concept in terms of wages, think of this example:

Suppose you want to renew your season tickets with the Yankees but have been skeptical of them because they haven’t won a World Series in years (I know, I’m a Yankees fan).  The Yankees offer you a contract as an incentive. That contract states that if you continue to be a season ticket holder for two years, you will get front row seats for 10 games of your choice. 

Now suppose that you stayed a season ticket holder for two years, would anyone really argue that you were not entitled to get those front row tickets?  Wouldn’t there be an outrage if the Yankees just unilaterally decided not to honor the terms of that deal anymore? And wouldn’t there be an outrage if the government stepped in to prevent such tickets from being issued? 

Connecticut’s wage laws are going to be under a spotlight for a little while.  I just hope we’ll get some sound analysis of the issues involved rather than soundbites. Somehow, I’m not convinced we’ll get that over the next few days.

Update 5 p.m. Several legislator and state officials today that they were working on a way to re-write state wage law.  CT News Junkie has all the details.  There’s even a draft proposal that would define a "bonus" and "retention bonus" under state law and prevent the doubling of penalties for any failure to make such payments.  Making changes to the wage law to include definitions of "bonuses" and "retention bonuses" may only add to the confusion present here. 

Additionally, simply because there is a plan or contract here, does not mean that there are never ANY escape clauses to them. The Word on Employment Law points out a few here.

  • kent

    If you were buying tickets to a game, you’d be entitled to the reasonable economic benefits of what you paid for (bought). As you suggest, you’re entitled to front row seats for a small portion of the games you paid to see.
    That’s different than being paid millions based on the expectation that your services are worth some unsustainable windfall; that you’re entitled to join the greedsters/economic pirates and deserve your cut despite the economic bus being in the ditch (and possibly you helping drive the bus into the ditch). That was a promise that was “too good to be true.”
    More like: you sell hot dogs at the ball game for a commission, knowing the stadium charges outrageous prices, because the stadium promises you that in five years they’ll pay you a million dollars. Say it works for five (or 30 years). Then it doesn’t. Do the last vendors get their million from the bankrupt stadium?
    I’m not outraged the Ponzi scheme failed and the last ones to collect the loot don’t get it (or have to return it to out-of-pocket victims). We don’t have to pay it.

  • Dan Schwartz

    Certainly, if a company makes promises to its employees that they both parties know are not realistic, then arguably the contract is not made in good faith. But that’s different than if a company is going to merge with another one and knows that in order for the transaction to work, they HAVE to keep their key employees into place. Even if the amounts SEEM high, they may be necessary to keep the company afloat.
    I’m not commenting on the retention bonuses here because many of the arguments now are political ones — not legal — and this blog has tried to remain staunchly apolitical given the emotions that employment law issues tend to create.

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