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News, trends and analysis in employment law, HR, safety & workers' comp

Mar 29, 2018

Q&A: Be realistic when promising employee bonuses

Q&AWage and Hour 

Question: Our employee handbook states that all new employees will receive a $3,000 bonus on their three-year anniversary. Five employees will be eligible this year. Business is down and we really can’t afford this anymore. Do we have to pay them?

Answer: Yes. A court would likely find that the company has a contractual obligation to pay the bonuses. The company made an offer to pay a bonus if one condition is met: employment for three years. An employee accepts this offer by beginning performance, which in this case means working toward the three-year mark. Once the offer is accepted by performance, it cannot be modified or revoked.

Leave Employee Bonus Programs Out of the Handbook

Enforceable contracts can arise from verbal, implied, or written representations and promises. If you have an employee bonus program, it is a good idea to put it in writing, but not as part of your handbook. The handbook is meant for ongoing policy guidance, while a bonus program typically should be reviewed and updated at least once a year to take into account any changes in business circumstances. The longer the timeframe you establish for payout of a bonus, the greater the financial risk to the company. We recommend having a shorter time frame. If times are tough, you can discontinue or modify the bonus program without changing your handbook, so long as you fulfill your promise with respect to those employees who have already begun work with expectation of their bonus.

As a start, let’s get that language out of the handbook! In a document separate from the handbook, you should clearly outline your employee bonus program, including:

  • who is eligible;
  • what conditions, performance standards, or goals must be met;
  • how payment is calculated and made; and
  • when the bonus is forfeited.

Recent Case: Words of Caution

Recently, the U.S. Eighth Circuit Court of Appeals ruled that managers could hold a national restaurant chain to its promise to pay them a five-year bonus under a written compensation plan. The bonus amount was based on the profitability of their restaurants. After the managers signed off on the plan and began working toward their five-year bonus, the company put a cap on the amount to be paid. Two years later, the managers sued, alleging breach of contract. The company argued that the managers agreed to the bonus cap because they continued to perform work under the employment agreement after the cap took effect. The managers won. The court ruled that the company couldn’t back out of the original agreement. The time to withdraw or modify the offer was before the managers began performing in exchange for the promise (Boswell v. Panera Bread Company (8th Cir, Jan. 2018)).

More Advice on Wage and Hour Laws

For more help on this topic, check out other wage & hour blog posts or learn more about our employment law advice services. As a Vigilant member, employers can receive unlimited legal counsel for a flat monthly fee.

This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.