Adding Insult to Injury – Termination and Bonus Season

Key Takeaways: 

• The timing of terminations before bonus payouts raises concerns of fairness, especially in finance, where bonuses often constitute a significant portion of annual income.
• The type of bonus—contractual or discretionary—dictates entitlements.
• Severance packages usually disregard bonuses which can cause financial hardship for a terminated employee who was expecting it.

One of the most disheartening experiences is being terminated right before bonuses are paid out. The timing of these terminations can raise questions about the fairness and legality of the employer’s actions, particularly if the termination seems strategically timed to avoid bonus payouts. This scenario is all too common and can feel like adding insult to injury for those affected.

The disappointment is particularly poignant in sectors such as finance, where bonus payouts often surpass regular salaries, serving as a substantial portion of an employee’s annual income.

When an employee is terminated, as part of their separation agreement, they may be offered a severance package with financial compensation intended to soften the blow of job loss. However, these packages are typically based on some period of salary period – for example, a severance payment equal to four weeks of salary – and completely ignore any bonus.

Understanding the Types of Bonuses

Bonuses in employment contexts range from entirely unwritten expectations based on workplace customs to explicitly stated terms within employment contracts:

• Unwritten Bonus Expectations: At one end of the spectrum, bonuses may be awarded based on unwritten customs or traditions within the company. These are usually discretionary and depend on the employer’s decision, but over time, they may become an expected part of the compensation package.
• Company Policy-Based Bonuses: Some companies may have generic language in their policies stating that bonuses are discretionary and identifying what factors may be considered in awarding such bonuses, such as performance, company profitability, or other criteria outlined in the policy.
• Contractually Guaranteed Bonuses: At the far end of the spectrum, there are employment agreements that explicitly state an employee shall receive a bonus and what the amount or target amount of that bonus is. In the event of termination, the employee’s entitlement to the bonus will depend on the specific language in the contract regarding bonus payout upon termination.

Understanding where your bonus falls within this continuum is key.

Bonus Entitlements – Some Examples

One of the most sensitive issues for an employee who was terminated is their entitlement to an anticipated belief. Employees who come to us often believe – and understandably so – that since they’ve worked for most of the bonus year, they should be entitled to receive their bonus, regardless of their termination.

Unfortunately, the harsh reality is that terminated employees are not entitled to their bonus in most situations. It’s a bitter pill to swallow, but it’s the legal landscape we currently navigate.

The classic case that serves as an exception to the rule of non-payment of bonuses post-termination is where an employee is terminated but is owed commissions. The key here is that the employee must have earned those commissions before their termination.

Let’s take the example of Jamie, who worked as a headhunter at an executive search firm. In terms of her agreement with the company, she was eligible to earn commissions for placements “arranged” by her. Jamie was terminated in March, the same month the firm received a fee in connection with a placement she handled. The commission from this fee would have been paid out in April. However, the commission agreement stipulated that no commission would be due if the employee was no longer employed on the date the commission would be paid. Despite this clause, the court held that Jamie was entitled to commissions for placements arranged prior to her termination. This decision was rooted in New York’s public policy against the forfeiture of commissions earned.1

This reasoning has also been extended to bonuses – but only in specific circumstances.

Under New York law, an employee’s entitlement to a bonus is dictated by the terms of the bonus plan. This can either be a generalized plan applicable to all employees or stipulations within an individual’s employment agreement. The key determining factor is the extent of the company’s discretion concerning the bonus.

To illustrate this, consider the case of Joseph, who worked as the president of a national division at an electrical contractor company. His employment agreement stated that he was entitled to participate in any annual incentive program that the company implemented, which would be based on the company’s financial performance with set incentive thresholds. Distribution of this bonus was subject to approval by the company’s executive management.

Joseph was informed in November that his employment would be terminated on December 31. Even though Joseph had worked the entire incentive period, the company refused to pay out his bonus, arguing that payment of the bonus was discretionary. The court disagreed because the language of the incentive program tied the bonus to specific performance metrics of the company. In this particular case, the phrase “subject to approval” by management did not make it entirely discretionary. As such, Joseph had a valid claim for a breach of contract due to the company’s failure to pay his bonus.2

In another instance, Jessica, the chief medical officer at a pharmaceutical company, was entitled to participate in the company bonus plan with a target bonus equivalent to 35% of her base salary. Her employment agreement conditioned the bonus on the satisfaction of both individual and company objectives as established in writing.

Jessica claimed that the company fabricated a record of poor performance to justify terminating her for cause and avoid paying her bonus and other compensations owed. The annual program was subject to board approval, but not individual bonuses. The court found that this was not discretionary, and that Jessica also had a viable claim for a breach of contract based on the company’s failure to pay her bonus.3

Many bonus plans or agreements explicitly state that the payment of a bonus falls solely within the company’s discretion, or they use similar language. The language used can significantly impact an employee’s claim to such bonuses.

Take Jesse’s case, for instance. Jesse worked at an entertainment company and was terminated. He argued that the termination was strategically timed to avoid paying him commissions and bonuses he had earned. However, a company memo detailing performance incentives plainly stated that all performance incentives were allocated at the discretion of the company’s senior management. As a result of this provision, Jesse had no viable claim against the company for the payment of the commissions and bonuses.

In a similar situation, Julie, who worked for a pharmaceutical company, was terminated in February before the previous year’s bonus payout. Her offer letter stated that she was eligible to participate in the company’s bonus program. However, the language in the company’s compensation policy made it clear that the company reserved the right to modify or terminate incentive plans at any time at its discretion. It further noted that an employee needed to remain at the company to receive a bonus and that eligibility to participate did not guarantee a bonus. These terms, combined with the explicit language used, meant that the bonus was discretionary, and the company was not obligated to pay it upon Julie’s termination.

A further point you should consider is whether you’ve already bargained for some protection in your contract. If so, you won’t be granted additional protection. This was the case for Andrew, the president of a Ben Stone, a manufacturing company.

Andrew’s employment with Ben Stone was governed by an executive agreement that provided a $250,000 special sales bonus in the event Ben Stone was acquired by another company and Andrew was terminated within 7 days of the acquisition. Dynamics acquired Ben Stone and fired Andrew, without cause, 29 days later without paying the special sales bonus. Andrew alleged that Dynamics breached the duty of good faith and fair dealing by deciding to fire him before the acquisition closed and then delaying termination until after the period for the special sale bonus entitlement. Ultimately, the court dismissed this claim. Andrew, a high-level executive, had negotiated for the 7-day period in which he was entitled to the special sales bonus; the failure to pay him for a termination outside of that period was hardly a denial of something he reasonably expected.4

This case demonstrates the complexities involved in disputes over bonuses and termination, highlighting the critical role of explicit contract terms. It serves as a cautionary tale for employees and employers to ensure that employment contracts are clear, comprehensive, and carefully negotiated to protect their interests.

Final Thoughts

The entitlement to a bonus payment upon termination is not straightforward and depends on several factors, including the bonus, the specific language of your employment agreement and/or the company’s bonus plan.

If you find yourself in a situation where you’ve been terminated before a bonus payout, you should consider seeking legal advice to understand your rights and explore potential claims for unpaid bonuses or unlawful termination. Moreover, before you sign any separation agreement, you should review it with an employment attorney to make sure your rights are protected.

Frequently Asked Questions

What happens if you get fired before bonus?

If you are fired before the bonus payment date, you generally lose the right to receive the bonus, especially if it’s discretionary. However, if the dismissal is deemed unfair or the employer acted in bad faith, you may have a claim for lost earnings, including the bonus. Bonuses are often contingent on being employed on the bonus payment date and not under notice. If the bonus is contractual and earned, you might have recourse, but discretionary bonuses are rarely paid out after termination.

Does a company have to pay out my bonus if I quit?

Whether a company must pay out your bonus if you quit depends on the bonus’s nature. If the bonus is discretionary, the employer generally has the right not to pay it if you quit before the bonus payment date. However, if the bonus is contractual and earned, you may have a claim to receive it depending on the specific terms and conditions outlined in your contract or separation agreement.

 

About the author

Mari Bonthuis is a litigation partner at Sterlington, leading the firm’s dispute resolution practice. She is a highly skilled litigator who has tried numerous cases in federal and state courts as well as before arbitrators. Mari’s expertise encompasses a wide range of complex legal matters, including employment agreements, partnership disputes, separation disputes, including those with non-compete clauses, commercial and financial arrangements, insurance coverage, and securities litigation.

 

[1] Based on Arbeeny v. Kennedy Executive Search, Inc., 893 N.Y.S.2d 39 (1st Dep’t 2010).

[2] Based on Smith v. Railworks Corp., 2012 WL 752048 (S.D.N.Y. Mar. 6, 2012).

[3] Based on Fischkoff v. Ioance Biotherapeutics, Inc., 2018 WL 4574890 (S.D.N.Y. July 5, 2018)

[4] Based on Woodard v. Reliance Worldwide Corp. 2019 WL 3288152, (S.D.N.Y. July 22, 2019).

 

Disclaimer: This article is made available by Sterlington for informational purposes only. It is not intended to provide specific legal advice and should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Using this website does not establish any attorney-client relationship between Sterlington and yourself.