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Vick's Case Is A Good Reminder About Treatment of Bonuses Under CA Law

Jailed quarterback Michael Vick can keep nearly $20 million in bonus money he received from the Atlanta Falcons following a ruling today by a federal judge. While Vick’s case involved interpretation of the NFL collective bargaining agreement, how bonuses are treated is often a sticky area of the law for California employers. Vick's win today is a good reminder to California employers to review how they should be treating bonuses. Below is a general overview of California’s DLSE’s opinion regarding how California employers must treat bonuses (with some commentary added).

DLSE’s Definition of Bonus:

The DLSE opines that a bonus is money promised to an employee in addition to the salary, commission or hourly rate usually due as compensation. The word has been variously defined as “An addition to salary or wages normally paid for extraordinary work. An inducement to employees to procure efficient and faithful service.” Duffy Bros. v. Bing & Bing, 217 App.Div. 10, 215 N.Y.S. 755, 758 (1926). Bonuses may be in the form of a gratuity where there is no promise for their payment; or they may be required payment where a promise is made that a bonus will be paid in return for a specific result.

An employee forfeits bonus if the employee voluntarily terminates employment before bonus vests, and employer states that bonus is contingent on continued employment.

An employee who voluntarily leaves his employment before the bonus calculation date is not entitled to receive it if the employer has expressly qualified its promise of a bonus on a requirement of continued employment. Lucien v. All States Trucking (1981) 116 Cal.App.3d 972, 975. This has been the rule ever since Peterson v. California Shipbuilding Corp. (1947) 80 Cal.App.2d 827, 831, 183 P.2d 56. The California rule is in accord with the prevailing view that where a definite bonus or profit-sharing plan has been established and forms part of the employment contract, the employee is not entitled to share in the proceeds where he leaves the employment voluntarily prior to vesting. (See DLSE Opinion Letter 1993.01.19)

If employer has not conditioned bonus on employment at time of payment then the employee may be entitled to receive bonus.

Where the promise of a bonus is not expressly conditioned on continued employment an employee who voluntarily leaves employment may be entitled to the bonus if other applicable conditions have been satisfied. Thus, in Hill v. Kaiser Aetna (1982) 130 Cal.App.3d 188, an employee who resigned on January 3, 1978, was held to be vested in his right to a bonus for calendar year 1977 where: (1) the bonus plan did not expressly require continued employment, and (2) the bonus was an inducement for continued employment. Id., at 196.

Caution: implied contract for bonus could be created by employer’s actions.

The regular payment of the bonus in past years may ripen into an implied contract for compensation in the absence of a specific contract. (D.L.S.E. v. Transpacific Transportation Co.(1979) 88 Cal.App.3d 823; cf. Simon v. Riblet Tramway Co., 8 Wash.App. 289, 505 P.2d 1291, 66 A.L.R.3d 1069, cert. den. 414 U.S. 975, 94 S.Ct. 28 9, 38 L.E d.2d 218 ). However, in order to be actionable, there must be some objective criteria upon which the bonus is based.

There is an exception to this general rule if bonuses which are completely discretionary, based on no objective criteria and are not routine, would not give rise to an implied bonus contract.

Termination of the employment by the employer could create obligation to pay bonus to the employee.

Common law contract theories will not allow one party to the contract to prevent the other party from completing the contract. If the employee is discharged before completion of all of the terms of the bonus agreement, and there is not valid cause, based on conduct of the employee, for the discharge, the employee may be entitled to recover at least a pro-rata share of the promised bonus. (DLSE Opinion Letter 1987.06.03) Again, if a bonus is discretionary, this general rule would not apply.

Full post as published by California Labor & Employment Defense Blog on February 04, 2008 (boomark / email).