Perhaps as part of your
employee compensation package you offer an annual bonus based on the company’s performance.
Can you condition eligibility for the bonus on an employee still working for
you on the bonus payout date? According to a new
is yes.
Two Bonus Plans
When Barbara Neisendorf
became a Levi Strauss vice president, the terms of her employment offer included
a $250,000 annual salary, a $250,000 signing bonus, and participation in two
bonus plans: the Annual Incentive Plan (AIP) and Leadership Shares Plan (LSP).
The AIP is an annual
bonus based on individual and company performance. The plan sets an annual target
bonus amount for each employee, but the actual payout could be zero. The plan
specifies that to be eligible for an AIP bonus in a given year, the employee must
be an active employee on the payment date, unless termination is because of
retirement, layoff, long-term disability, or death. The plan states: “If an employee
is involuntarily discharged (e.g., for poor performance or misconduct) prior to
the AIP payment date, that employee will have no right to AIP.” AIP payments
are typically made in February following the close of the prior fiscal year.
The LSP is a long-term
incentive plan that provides for potential payouts if company performance goals
are reached. The payout amounts, if any, are determined in January or February,
based on a review of the company’s financial performance in the prior year and
must be approved by the Levi Strauss board. Like the AIP, eligibility for an
LSP bonus hinges on employment status—an employee who is terminated for
unsatisfactory performance or gross misconduct before the payment date is not
entitled to the LSP bonus.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Employee Fired for Poor
Performance
During Neisendorf’s two
years with Levi Strauss, she had performance problems that were documented in a
performance review. She then went out on an extended family and medical leave.
On returning, she was terminated because of her unwillingness to acknowledge
and address her performance problems. The termination occurred in November. The
following February, Levi Strauss paid out employee bonuses under the AIP and
LSP, but didn’t pay a bonus to Neisendorf.
Neisendorf sued. She
charged that the company illegally withheld a bonus she had earned. She claimed
that she was entitled to the bonuses because they were based on company profits
during a period when she was still employed. She argued that withholding
payment because she wasn’t employed on the date of payout was akin to illegal
withholding of wages due.
No Bonus Due
But a
that under the clear terms of the AIP and LSP plans, Neisendorf was not
entitled to the bonus payments. The court explained that Labor Code provisions
barring employers from refusing to pay wages apply only when the wages have
been promised as compensation for employment, and all conditions agreed to in advance
for earning the wages have been satisfied.
The court went on to
explain that bonuses are considered wages. Thus, once a bonus has been promised
as part of an employee’s compensation, it must be paid if the employee fulfills
all the conditions of payment. But here, Levi Strauss didn’t promise Neisendorf
that she would earn the bonuses merely by working for the company during the
relevant fiscal year. Rather, the bonus payout was tied to the condition that
she not be terminated for cause before the payout date.
Review Bonus Plans
In light of this
decision, it’s a good idea to review the terms of your bonus program to make
sure they clearly specify the conditions required to earn the bonus. Among
other things, make sure your bonus plan addresses whether the employee must be
actively employed at the time of the bonus payout, as well as other eligibility
factors such as how long an employee must be at the company to be eligible for
a bonus. In addition, it’s always a good idea to have employees sign a statement
acknowledging that they have read and understand the terms of the program.
This new case is
available online at www.courtinfo.ca.gov/opinions/.
_
1 Neisendorf v. Levi
Strauss & Co,
Court of Appeals (Dist. 1) No. A109826, 2006