The following article appeared in the September 13, 2010 edition of the Hartford Business Journal.
By Mark Dumas
Bonus season is months away, but don’t tell that to Joseph Wall, a former executive at a consulting company in West Hartford. Five years ago, his former employer refused to pay roughly $120,000 in bonuses that it owed him. He sued and he won. The judgment was for $378,000 — more than twice the amount of the bonus plus another $94,000 in attorneys’ fees.
Disputes over unpaid bonuses, like Joseph Wall’s, are heading to court at an increasing rate. Layoffs and corporate belt-tightening have contributed to this trend, but the driving force behind the rise in bonus litigation is a state law that says an employee can recover double damages and attorneys’ fees for unpaid wages.
Two weeks ago, the Connecticut Supreme Court ruled that Wall’s bonuses should be considered part of his “wages” for the purposes of the unpaid wage law. This decision turned his $120,000 breach of contract case into a $378,000 wage law judgment.
This may seem like bad news for employers, but the state Supreme Court issued another decision just two months earlier with a seemingly opposite result. The earlier case involved a prominent New London law firm and a junior attorney who was on his way to becoming one of the state’s most successful trial lawyers. Like Wall, the star attorney claimed that his former employer failed to pay a contractual bonus and that the wage law should apply. The Supreme Court disagreed. The lawyer was entitled to his bonus and interest, but nothing more.
So why was one employer forced to pay double damages and attorneys’ fees for an unpaid bonus while another “escaped” with a judgment for just the bonus plus interest?
According to the court the key difference was that Wall’s contract included a straight forward formula for calculating his bonus while the lawyer’s contract did not. The attorney’s contract with his law firm was vague enough to support a breach of contract claim, but the stakes in a wage law case were much higher. Fairness and due process required more than an ambiguous right to an undefined bonus if an employee seeks double damages and attorneys’ fees.
So what should an employer do following this year’s bonus season at the Connecticut Supreme Court?
At the risk of oversimplifying the law, employers can follow three important steps to limit the risk of one day writing “bonus” checks for double damages and attorneys’ fees.
- The payment of bonuses should be discretionary. In both cases decided this summer, a trial court determined that the bonuses were contractually required. With Wall, the contract explicitly included bonuses. In the lawyer’s case, his contract did not address bonuses, but a court was able to interpret the agreement to include the bonus because the contract was poorly drafted. In either case, a clearly written contract that explicitly stated that bonuses would be paid at the employer’s discretion could have avoided any judgment against the employer.
- The amount of bonuses should not be fixed. Courts do not like to pick numbers out of the air. That is one reason why the court ruled that the star lawyer’s bonus should not be considered wages. His contract did not include hard numbers. Although a court was willing to look at prior bonuses to “fill in the blanks” in a breach of contract claim, wage law cases are treated differently because violations can result in significant criminal and civil penalties. Avoiding fixed bonuses — both in writing and in practice — will help employers avoid those penalties.
- Do not use formulas to determine the amount of a bonus. Just because a specific bonus amount is not included in a contract doesn’t mean that an employer can dodge the wage law bullet. For the purposes of the wage law, a mathematical formula is just as good — or bad, depending on your perspective — as a specific number. This was the case with Wall. His contract did not include a fixed number but it had a bonus formula based on the profitability of the department he managed. While including a list of factors considered for bonuses can give an employer flexibility, hard quantifiable formulas can be used against an employer if a bonus dispute goes to court.
While these three steps can help businesses avoid running afoul of Connecticut’s wage law, the law can change directions quickly, as our state Supreme Court demonstrated this summer. Working closely with your personnel department and legal counsel can help you avoid these problems before they start.