Back in June, the Connecticut Supreme Court issued its decision in Ziotas v. The Reardon Law Firm — a significant ruling because it found that where a bonus is discretionary and is not ascertainable by applying a formula, it did not constitute "wages".
I talked about the case in a lengthy post and noted that the court left open the possibility of finding that a bonus can constitute "wages" in some cases:
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. …
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.
In case that will be officially released next week, the Court found exactly such a case in Association Resources, Inc. v. Wall (download here).
The Court concluded that the trial court properly determined that the bonuses in the present case were "wages as defined by § 31-71e (3) because, under the employment agreement, they were entirely nondiscretionary, both as to whether they would be awarded, and the amount thereof."
The Court examined the employment agreement, and found that the employer"
was contractually bound to pay the bonus to the plaintiff. Additionally, the amount of the bonus, which derived from the net profitability of the [Plaintiff’s group] after expenses, was nondiscretionary because it was subject to calculation by applying a contractually mandated, precise formula set forth in § 2.2 (b) of the employment agreement. That formula was based on the budgets of the Digital Group, one of which, for fiscal year 2003–2004, was attached to the employment agreement as a schedule, and the other, for fiscal year 2004–2005, that was plainly crossreferenced therein.
The court also distinguished this case from another case, Weems v. Citigroup, were it had held a bonus based on "subjective" factors, such as the profitability of a particular branch was also not a wage because the employee was not directly responsible for how the branch performed. Here, the court said that even though the profitability of the area was a factor in the bonus, that did not disqualify the bonus as "wages" because the employee at issue was the executive in charge of the area.
As the court said:
Put differently, to conclude that the bonus is not a wage because not every dollar earned by the [particular division or group] was directly attributable to the plaintiff’s labors would be to ignore the realities of his executive-level managerial position, which was to be directly and solely responsible for the profitability of that division.
In a footnote, the Court said that to read the statute any other way would be to exclude management-level employees from bringing any claim for unpaid bonuses under the state’s wage laws.
If we were to agree with the defendant’s reading of Weems v. Citigroup, Inc.,… then no management level employee overseeing the work of other employees would ever be entitled to prevail under the wage statutes when bringing a claim to recover an unpaid bonus. There is no indication in the language of the wage statutes or their legislative history that the legislature intended to exclude all management level employees.
There’s more to this opinion and in the upcoming days after digesting its implications, I’ll add some additional analysis and guidance. In the meantime, employers who have bonus agreements with their executive-level employees should dig into this case and others to figure out their exposure if such bonuses are not paid out. But more importantly, I stand by what I said back in June:
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.