A federal court judge this week rejected claims by the Connecticut Department of Labor that a company’s failure to pay a performance based bonus constituted a failure to pay wages.  In doing so, the Court appears to be in line with recent Connecticut Supreme Court precedents rejecting such claims as well.

In State of Connecticut Commissioner of Labor v. Chubb Group of Insurance Companies (download here), the CTDOL alleged that Chubb failed to pay an employee performance-based incentive wages for 2008 pursuant to the company’s Annual Incentive Compensation Plan. Under the Plan, the Organization and Compensation Committee of Chubb‟s Board of Directors “may reduce or eliminate any Award under the plan, . . . .”

As I’ve addressed in previous posts, a key factor in whether a bonus should constitute wages is whether the bonus is discretionary in nature.  The District Court adopted that logic in rejecting the CTDOL’s claims rather easily.

The Plan explicitly provided that the committee may reduce or eliminate any award under the Plan. This language makes the bonus discretionary, both as to whether it should be awarded and, if so, the amount to be awarded.

The Court also rejected claims by the CTDOL that it had the authority to bring the claim by a separate state statute. The problem with such a claim, the court said, is that the authority is still limited to claim to collect unpaid wages. Because the bonus is not a “wage”, there is still no authority for the CTDOL.

For employers, this case should again reinforce the fact that any bonus plans that you have should be reviewed by legal counsel.  Importantly, if the employer wants to provide some discretion in the payment of bonuses, it can reserve that right — but it has to be done carefully and explicitly.