Employee Bonuses: When are Employers Obligated to Pay Them?

by Andrew A. Kimler, Esq.

An issue which often plagues New York employers involves the payment of bonuses. While in some instances the law concerning an employee's right to be paid a bonus may appear to be quite clear, there are, nevertheless, circumstances which may pose a problem in determining an employer's obligation to pay bonuses.

As a general rule, an employee in New York has no enforceable right to compel an employer to pay bonuses where the bonus is discretionary. The employee's right to be paid a bonus is usually governed by the terms and conditions reflected in an employer's handbook or the parties' contract. It should be noted, however, that an obligation to pay a bonus may be enforceable even if the employer's bonus plan is only reflected in the parties' oral communications.

Whether unpaid "incentive compensation" under an employer's bonus plan constitutes a "discretionary bonus" or "earned wages" which are not subject to forfeiture, is the critical concern of the courts when dealing with these situations. For example, employees may enforce an agreement to pay an annual bonus made at the onset of the employment relationship where the bonus constitutes a "integral part" of the employee's compensation package. When determining whether a bonus is deemed to be enforceable and nondiscretionary, a court may consider the past practices of the employer. For example, in one case a former executive sued his employer for an unpaid bonus. According to the parties' contract, the employee could receive bonuses "from time to time" as determined by the employer's management. The employee asserted that the court should consider the past practices of the employer. More specifically, the employee contended that he was entitled to a bonus since he had received a bonus each year of his employment. The employer argued that the court should not consider the parties' prior practices since the parties' contract provided that bonus payments were at the discretion of the company. Refusing to dismiss the employee's claim, the court noted that the parties' agreement was ambiguous with respect to the amount of discretion the employer had concerning the payment of a bonus. In that regard, the court noted that the employee had successfully demonstrated that the employer had a past practice of paying bonuses based upon meeting certain goals and thus, the payment of a bonus was not purely discretionary. Accordingly, the court concluded that the parties' course of dealing could be considered as an indication that the parties understood the employment contract to mean that the employee would be entitled to a bonus if certain financial goals had been achieved by reason of the employee's efforts. Under such circumstances, the bonus would not be deemed "discretionary" and the refusal to pay it would be deemed to be a breach of contract by the employer.

On the other hand, a bonus plan may give an employer absolute discretion and provide that it is not earned until it is paid and it will not be paid if the employee is no longer with the company on the date of payment. Under those circumstances, an employee who is no longer with the company may not have an enforceable claim. It has also been held by the courts that merely because the bonus to be awarded was not specified does not make the contract unenforceable. In that regard, employment contracts that contain open additional compensation clauses are nonetheless binding agreements. That the amount of the bonus cannot be determined does not bar recovery under an implied contract. Thus, the court can consider the circumstances and determine whether there are sufficient guidelines to enable it to determine a bonus figure.

In order to avoid disputes concerning the enforceability of bonus arrangements, it is best that both employer and employee enter into a written agreement which reflects with specificity their understanding. For example, the understanding (which can be reflected in an employee/employer handbook) should provide whether the employee is entitled to a bonus based upon certain performance goals. Moreover, the parties' understanding should provide how much discretion the employer has in the payment of bonuses or whether the payment of bonuses are purely discretionary. As noted above, the bonus plan may also provide that the bonus is not only discretionary, but that it is not earned until it is paid. Moreover, it may provide that it will not be paid if the employee is no longer with the company on the date of payment. Clearly, the language that is used in a bonus plan will play a significant role in determining the enforceability of an employee's bonus claim. The best way to avoid contentious litigation is to make certain that the parties' understandings concerning the payment of bonuses are comprehensively and accurately reflected in a written agreement which should be carefully drafted with the assistance of counsel.