Suppose your company has an incentive bonus plan that bases a bonus on the specific work done during a calendar year.  Bonus payments are made 90 days after the end of the calendar year on an “Award payment date.”

But your bonus plan has an important provision.  That provision states that “Participants must be employed by [the] Employer as of the Award payment date or [the employee] will forfeiture the Award”. (This was a hypothetical I touched upon nearly three years ago.)

Is that “forfeiture” or “eligibility” provision legal under Connecticut law? It has been presumed to be the case, particularly in cases where the bonuses are discretionary (as was discussed in a Weems case a few years ago).

The Connecticut Department of Labor recently brought suit against a local  employer on that exact question.  (The employer recently removed the case to federal court.) The outcome of that case could have significant implications for employers.

Issues surrounding bonuses and wages are nothing new for Connecticut courts.  Indeed, in the last year or so, we’ve seen both the Ziotas and Association Resources cases outline the circumstances in which a bonus could be deemed to be wages.

But one of the things that the courts in those cases were concerned about was the settled expectations of an employee. In other words, if an employee worked hard for the year in the expectation of a bonus that appeared to mandate a particular bonus if set goals or criteria were met, it would be unfair for an employer to change the rules midstream.

The new CTDOL case is different.  Here, the employer had a forfeiture provision which made it clear that employees would have to be employed on a date certain in order to receive the bonus, even presuming that they did the work during the year to otherwise meet the bonus provisions. The CTDOL, in bringing the lawsuit, is challenging the provision in its entirety and is saying that such forfeiture provisions are not valid at all.

Of course, by calling it a “forfeiture” provision, the CTDOL is trying to gain the upper hand.  After all, if it is viewed as trying to shoot down a mechansims for “forfeiting” a bonus (thereby suggesting that the employee already earned it), the department can claim the high road.  For the employer, calling it an “eligibility” provision might be a better tactic.

For employers with bonus plans, this case could have big implications if this forfeiture provision is struck down. So stay tuned.

Bonus Lawsuit