Back from a long holiday weekend, my colleague Chris Parkin this morning takes a look at a new Connecticut Appellate Court case about employee compensation.
A new case that will be officially released tomorrow reminds employers to take care with their words and promises when it comes to employee compensation.
The facts of the case are fairly straightforward:
A 20-year employee for a major financial firm had been rewarded handsomely with generous six-figure bonuses that typically exceeded his annual base pay. The financial crisis hit the employer hard. Bonuses paid in early 2008 were down appreciably compared to prior years. By 2009, the employer had been infused with cash from the United Kingdom government to maintain stability.
The tenuous financial position caused the employer to alter its bonus system. In January 2009, bonus eligible employees were advised that they would be subject to a “deferral program.” This program called for the bonuses to be paid as bonds with vesting dates over a three year period. The full amount of the bond would only be owed if the employee was still employed by the employer at the end of the three year term.
The employee resigned before the first vesting date and the employer determined that he forfeited his right to payment on the bonus bond. The employee sued, alleging that he was entitled to his bonus as a matter of contract.
The lower court said that there was no contractual obligation to pay a bonus because the employee was never guaranteed a bonus but rather was simply eligible for one in the discretion of his employer.
On appeal, the Appellate Court agreed, noting that while, “all employer-employee relationships not governed by express contracts involve some type of implied contract of employment,” there was no contractual obligation to pay a bonus here.
The Court’s analysis in Burns v. RBS Securities, Inc. (download here). hinged on the fact that no evidence was introduced to suggest that the employee was ever guaranteed a bonus. His supervisor testified that the employee had only been told he was “eligible” for a bonus and the employee handbook clearly conditioned the payment of any bonus on discretionary factors including the health of the company. There was also undisputed evidence that the financial health of the employer was “abysmal” at the time.
The one argument available to the employee was that he was entitled to the bonus because an implied obligation arose over the course of years of generous annual bonus payments. The court flatly rejected this argument noting that “the mere practice or custom of an employer does not, by itself, create a contractual obligation.”
This decision is, of course, good news for employers who are careful not to make promises about bonus payments. Managers should be trained not to make any promises about bonuses unless there is absolute certainty that the company will make such payments. Handbooks should similarly be drafted to prevent the creation of an implied contract to pay a bonus.
The Appellate Court underscored this advice by distinguishing another matter, Ziotas v. Reardon Law Firm, P.C. (which was covered here back in 2010). In Ziotas, the court said the employer was obligated to pay a bonus because it made a verbal promise that “this has been a very successful year for the firm, and for you, and… you’re going to get a bonus that fairly reflects that.”
It may not sound like much, but the difference between, “you’re getting a bonus” and “you’re eligible for a bonus” could be costly.