A number of years ago, we published a blog setting out several tools employers have used to deny employees what we believe are earned bonuses as well as some ideas about legal principles on which an employee might rely to get those bonuses back.  For that complete blog post, scroll to the bottom of this page.  Now more than five years later, as March draws near again and employees anxiously await receipt of bonuses which they worked hard for all last year, we thought it was time to take a look again at how the courts have been treating these issues and update you on your rights regarding these important pieces of compensation.

Unfortunately, since originally posting on the vanishing bonus, the courts have granted employers even more latitude in refusing to pay bonuses which employees reasonably expected to receive under the terms of their employment contracts and policies.

For instance, in McLaughlin v. Sternberg Lanterns, the first Illinois appellate decision in nearly twenty years to consider whether a bonus amounts to “earned compensation” to which an employee is entitled under his or her contract and/or the Illinois Wage Payment & Collection Act, the court upheld an employer’s denial of an annual bonus despite that 1) the employee had been paid a bonus in each previous year in which bonuses were granted to employees company-wide; 2) the employee had already been approved for a bonus for the year at issue; and 3) the employee was terminated just weeks before that approved bonus should have been paid out.  See 395 Ill. App. 3d 536 (2d Dist. 2009).

Unfortunately, the McLaughlin decision is one in which bad facts likely led to bad law – the plaintiff in that case was terminated after he had initially been approved for his bonus when it came to light that he had sent emails to a coworker which violated the company’s anti-harassment policy.  As a result, he was held to be ineligible for the bonus because he was not in good standing with the company.  In considering whether the employee should have been entitled to his bonus, the court held that where a bonus policy does not unequivocally grant an employee a right to their annual bonus – for instance, where the policy contains discretionary language or is dependent upon the success of the business as opposed to the success of the individual employee – the bonus is not “earned” and the employee is not automatically entitled to the compensation.  Id. at 544.

This decision is frustrating given that most employers these days include some language in their bonus policies reserving discretion for whether to award the compensation to the company and many bonuses are conditioned, at least in part, upon company-wide performance measures.  In light of McLaughlin, these sorts of bonuses will likely now be held to be equivocal or, in other words, not guaranteed or earned.  Thus, under McLaughlin, an employer may be allowed to refuse to pay all or some part of an annual bonus despite that the employee worked hard throughout the year with the reasonable expectation that he or she was working in part to earn the expected bonus compensation.

Despite this discouraging development, we have seen a new line of cases restore a little life to the vanishing bonus.  In several cases decided since McLaughlin, we have seen courts allow employees to pursue breach of contract actions against employers for unpaid bonus compensation on the theory that the employer breached an implied covenant of good faith and fair dealing in denying the bonus.  In those cases, the courts have explained that where a contract gives the employer discretion to refuse to pay a bonus, the employer is expected to exercise that discretion in good faith.  Nathan v. Morgan Stanley, 2012 WL 1886440 at *13 (N.D. Ill. May 22, 2012).  In other words, the fact that a bonus plan gives the employer discretion to deny a bonus or terminate the bonus plan altogether without paying bonuses, “does not mean that [the employer] is necessarily incapable of abusing that discretion.”  Wilson v. Career Education Corp., 729 F.3d 665, 675 (7th Cir. 2013).

While this sort of rule may be less applicable to the average bonus denial, it does at least create a legal claim which employees may pursue in those egregious situations where an employer’s denial of the bonus is entirely suspicious or conveniently timed.  For instance, where an employer refuses to pay a bonus based on poor performance, but fails to even measure the employee’s performance before denying the bonus, the employer likely failed to exercise good faith and, as a result, breached the bonus agreement.  Similarly, where an employer terminates an employee just weeks or days before his or her bonus becomes due and without legitimate justification, the employer may have failed to exercise good faith in allowing the employee to satisfy the conditions required for receipt of the bonus and may have breached its contract.

As is true of much of the case law interpreting the earned bonus that came before, these new decisions are entirely fact-specific.  In other words, whether or not you are entitled to your bonus or whether or not your employer failed to exercise good faith in denying you a bonus under a discretionary bonus policy will depend upon the facts leading up to that denial.

We recognize that employees often accept jobs in large part because of their bonus potential and that they dedicate themselves to their jobs with the expectation that if they work hard and meet the responsibilities of their roles, they will be rewarded for their efforts.  So, if you feel as though your bonus was denied for a reason that feels suspicious or, even, for no good reason at all, it may be worth your while to contact an attorney to discuss whether you may be entitled to your compensation despite that the company had the discretion to deny it.