Recent Cases Highlight the Importance of Carefully-Drafted Bonus Policies

by David W. McBride

By now, Massachusetts employers should be familiar with the Massachusetts Wage Act’s requirement that terminated employees must be paid all earned wages either on the day of discharge (for employer-initiated terminations) or on the next regular pay day following the last day of work (in the case of employees who voluntarily terminate their employment).  However, what constitutes wages “earned” as of the termination date can be a hotly-contested issue and can lead to disputes over unpaid overtime, travel or expense reimbursements, accrued vacation, commissions, or bonuses.  Two recent Massachusetts cases, one from the state’s Appeals Court and the other from the federal District Court, focus on the issue of bonuses and whether and under what circumstances bonuses must be paid to employees upon termination from employment.

In Young v. Fidelity Research and Analysis Co., decided earlier this year by the Appeals Court of Massachusetts, the issue was whether a terminated employee had qualified for a bonus before his termination. Per Fidelity’s employment contracts, employees were eligible for bonuses if they are actively employed as of December 1st of the “bonus year” and November 1st of the following year. The contracts also provided that employees would receive consideration for a prorated bonus if their employment was terminated through a reduction in force (RIF) or by position elimination.

In 2007, Fidelity terminated Young after the New York Stock Exchange (NYSE) took disciplinary action against Young for violating NYSE rules.  Since Young’s termination was not the result of a RIF or position elimination, Fidelity did not pay him a bonus for the prior year.  Young filed a lawsuit over the non-payment of the bonus, claiming that Fidelity had breached a duty of good faith and fair dealing by terminating his employment to avoid paying his bonus. This claim relied on a long-standing legal principle, that employers have a duty of fair, good-faith dealing with their employees, and that according to that principle, it is unlawful to terminate an employee’s employment for the purpose of denying him compensation that would become earned and payable if not for the termination.

The Appeals Court rejected Young’s claims, however, crediting Fidelity’s assertion that it terminated Young’s employment due to the NYSE’s disciplinary proceedings and not for the purpose of denying Young his bonus.  Accordingly, the Appeals Court upheld the Superior Court’s prior dismissal of Young’s lawsuit.

Also this year, in Comley v. Havas Media Group, et al., the U.S. District Court for the District of Massachusetts considered whether Havas Media Group had validly exercised its discretion to withhold a bonus from an employee that was terminated shortly after that decision.  Per the terms of her offer letter, Comley was potentially eligible for a bonus “based on individual performance and the company’s overall financial success.”  Havas’ bonus policy also had clear language that “the availability and terms of [bonuses] are at the sole discretion of Havas Media’s global Board of Directors and can be eliminated or amended at any time.” As of March 2013, management had calculated that Comley would receive a bonus of $104,160.00. However at around this same time, Havas senior management noted deficiencies in Comley’s performance, placed her on a performance improvement plan, revised her bonus amount to zero, and terminated her employment in June 2013.

Comley filed suit against her former employer, alleging in part that Havas had violated the Massachusetts Wage Act by failing to pay her the bonus she claimed to have earned. Comley argued that because the components of the bonus were objective criteria; i.e., her own performance and the company’s performance, it should be viewed as a commission which can be objectively earned and thus become payable upon termination. The court disagreed, and looked at the clear language that gave Havas Media absolute discretion to amend or even eliminate the bonus policy. Because Havas Media retained discretion to rescind bonuses or modify bonus qualifications at any time, it was never “earned” by Comley in any sense, and therefore Havas had no obligation to pay her.

These cases turned out well for the employer, but it is important to note that, in both of these cases, the courts focused on the language of the relevant bonus policies.  In both cases, the employers had carefully-drafted and precise bonus policies on which they relied in their decision not to pay bonuses.  Accordingly, employers that  provide bonus incentives should be sure to have written policies regarding those incentives that include clear conditions that must be met in order for the bonus to be paid.  Doing so can prevent headaches down the road when terminated employees ask “Hey, where’s the bonus I was supposed to get?!”

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