Yesterday, I discussed the Connecticut Supreme Court’s decision in Ziotas v. The Reardon Law Firm, in which the court held that a bonus does not constitute "wages" when the bonus is discretionary and is not ascertainable by applying a formula.
I’ve also discussed the background of the case in a prior post which I won’t repeat here. But after this case, employers may be wondering – why is this case significant?
As a practical matter, claims for unpaid wages can subject an employer to fines, double damages and attorneys fees. (in rare instances, there could also be imprisonment as well.) Thus, to the extent that an employer can defeat a claim on the grounds that bonuses are not "wages", it removes an key part of damages that might otherwise be recoverable.
In the Ziotas case, the employer ultimately lost a claim based on breach of contract, but just appealed the wage claim finding because it did not want to lose a wage claim based on the same facts (and presumably be subject to additional damages and attorneys fees).
The case is also significant because it resolves the issue of whether a contractually-based bonus constitutes "wages" in all circumstances. The court left the door open the possibility under the right set of circumstances, but rejected the argument here, based mainly on the fact that the amount of the bonus was indefinite.
For employers, this finding is particularly significant because some higher-level employees have contracts in which the bonus is discussed — albeit in discretionary terms. The court found that even though an employer would seem to be obligated to pay some bonus (and could be said to breach a contract if the bonus isn’t made), the fact that the bonus amount is indefinite is enough to make it clear that it does not constitute "wages".
But the court also made it clear that there are a set of circumstances in which a bonus might be deemed to be wages. If a bonus was ascertainable by a "set formula", then the bonus might be deemed to be "wages". For example, suppose a contract states that an employee is produce 2000 widgets over a year and if that goal is met, the employee is entitled to $1000. In that case, it seems to remove any discretionary on behalf of the employer as the amount or whether a bonus should be paid.
As a result, employers that want to keep some flexibility with their bonus systems may want to set up their bonus systems to merely discuss factors that will be considered in setting a bonus and also make it clear that the amount of such a bonus is discretionary and subject to change. It will make it more difficult (but not impossible) to argue that the employee had a reasonable expectation of a bonus payment under those circumstances.
The Supreme Court also seemed troubled by the fact that an employer could be subject to penalties and fines merely because the employee believed that he was underpaid in the bonus amount.
By way of example, if an employer paid a bonus but the employee subjectively believed that he was entitled to more money, it seems highly unlikely that the legislature would have intended that an employer would be subject to large fines and possible imprisonment under those circumstances.
Ultimately, this case provides an important marker in defining what constitutes "wages" under the state’s wage and hour laws. Employers may consider reviewing their current bonus arrangements to determine their exposure in light of this decision.