A recent survey shows
that while base-pay increases for employees remain modest, employers are
increasingly relying on bonuses to attract, motivate, and retain talent. The
survey of 1,028 large organizations, conducted by the HR consulting firm Hewitt
Associates, found that 80 percent of respondents currently offer at least one
type of broad-based variable pay plan, up from just 51 percent in 1991.
But the rise in bonuses
as a component of pay can also bring some tricky legal issues into play. One
new case from a federal appeals court tackles the issue of whether you can
prorate an employee’s production bonus based on absences protected by the
Family and Medical Leave Act (FMLA).
Our HR Management & Compliance Report: How To Comply with California and Federal Leave Laws, covers everything you need to know to stay in compliance with both state and federal law in one of the trickiest areas of compliance for even the most experienced HR professional. Learn the rules for pregnancy and parental leaves, medical exams and certifications, intermittent leaves, required notices, and more.
Employee Loses Out on
Full Bonus
Robert Sommer, a
financial administrator at Vanguard Group, took a short-term disability leave
under the FMLA for approximately 8 weeks. Because of this absence, Vanguard
prorated the bonus payments Sommer received under its Partnership Plan for the year
the leave took place in.
The Partnership Plan
provided for annual bonuses based on job level, length of service, and hours worked.
It stated that a qualifying employee who didn’t meet the annual goal of 1,950
hours worked would have his or her bonus prorated by the number of hours the
person fell short of the goal.
The plan defined hours
worked as follows: “the actual hours for which an employee is paid or entitled to
be paid by the Company for the performance of duties or for vacation, holidays,
sick time, or an approved leave of absence (including bereavement leave, court
duty leave, and military leave). Any employee who is on a disability leave of
absence under the Company’s short-term or long-term disability program shall
not be credited with Hours of Service during such leave of absence.”
Sommer sued, contending
that Vanguard illegally interfered with his FMLA rights by not awarding him a full
annual bonus payment but instead reducing his bonus amount based on the time he
was absent.
What Kind of Bonus Is
It?
The appeals court
explained that whether the FMLA permits a bonus to be prorated based on
protected leave depends on whether the bonus is a “production bonus” (such as
one that is based on the number of items manufactured or hours worked) or an “absence
of occurrence bonus” (such as for avoiding accidents or for perfect
attendance). For production bonuses,
proration is allowed for
the amount of any lost production, even if for an FMLA leave. However,
proration due to FMLA leave is not permitted for absence-of-occurrence bonuses.
The court concluded that
the Partnership Plan bonus was a production bonus because of the annual 1,950 hours-worked
goal and the plan’s specification that bonuses would be prorated by the number
of hours shy of that goal. The plan required employees to be employed during
the period for which the bonus was calculated in order to qualify for the
bonus, but this didn’t indicate that employees were being rewarded for the
absence of an occurrence—that is, resigning or getting fired.
Tips for Employers
In light of this ruling,
employers should review their bonus programs to make sure they comply with the FMLA.
If bonuses are prorated for FMLA leaves, the program must qualify as a
production bonus—one that rewards employees for some type of positive effort at
the workplace—and should clearly specify the productivity goals.
Also, be sure your production
bonus program spells out the types of leaves that will result in proration. If you
prorate a production bonus for FMLA leaves, the plan should also prorate for
other types of leaves to avoid charges that the program discriminates against employees
who take FMLA leave. Keep in mind, though, that the plan doesn’t have to
prorate for paid vacation and sick leaves.
You can link to this
ruling online at www.ca3.uscourts.gov/.
_
1 Sommer v. Vanguard
Group, U.S.C.A. 3rd Cir. No. 05-4534, 2006