California Supreme Court Upholds Bonus Plan's Forfeiture

Can a bonus plan provide for forfeiture of unpaid bonus if an employee voluntarily leaves employment or is fired for cause? Yes, said the California Supreme Court. Money quote:

“nothing in the public policy of this state concerning wages . . . transforms [a] contingent expectation of receiving bonuses into an entitlement.” (Neisendorf, supra, 143 Cal.App.4th at p. 522.) Only when an employee satisfies the condition(s) precedent to receiving incentive compensation, which often includes remaining employed for a particular period of time, can that employee be said to have earned the incentive compensation (thereby necessitating payment upon resignation or termination). (Ibid.; Lucian v. All States Trucking Co., supra, 116 Cal.App.3d at p. 975 [“An employee who voluntarily leaves his employment before the bonus calculation date is not entitled to receive it”].)

Here, of course, Schachter voluntarily terminated his employment before his restricted stock fully vested. By the terms of the Plan, and Schachter’s own concession, he is not entitled to those unvested shares of restricted stock. Having elected to receive some of his compensation in the form of restricted stock, a transaction he was aware carried risk as well as the potential for reward, Schachter cannot now assert that he should have been paid in cash that portion of his compensation he elected to receive as restricted stock.[1] As the company persuasively argues, Schachter’s “bargained-for ‘wages’ have been paid in full. He received all of his promised cash compensation, received immediately exercisable voting and dividend rights in the restricted stock, and was awarded contingent rights of full ownership in that stock. The only thing that has not been ‘paid’ is something Schachter never ‘earned’ — fully vested [company] stock. Schachter therefore has no claim under [section] 201 or [section] 202.” [1]

So, the Supreme Court has blessed bonus plans that require the employee to remain employed. However, the Court did note that Citigroup's plan would have paid certain compensation to Schachter if he has been fired without "cause," e.g., laid off. The Court approved this formulation, noting that employees terminated "without cause" may not be be deprived of the benefits of their contract. This was all "dicta" so it should not have much force. But the DLSE will rely on it to bolster its own enforcement position.

The case is Schachter v. Citigroup and the opinion is here.

Court of Appeal: No Post Termination Commissions for You

Here are the facts as stated by the court:

Defendant hired plaintiff as a sales representative on October 4, 1999. On that date, the parties entered a written employment agreement, which provided (among other things) that: (1) plaintiff was responsible for web-hosting sales; (2) plaintiff‟s starting salary was $24,000 per year, plus commissions of 4 percent "on all direct initial sales"; (3) defendant "will be eligible for commission pay as set forth in this [document], so long as [plaintiff] remains employed with the Company as a Sales Representative"; and (4) the employment agreement "may be amended only by a written agreement executed by each of the parties hereto."

In April 2001, defendant promoted plaintiff to "Channel Manager." The parties entered a new oral agreement that provided (among other things) that: (1) plaintiff‟s salary was increased to $75,000 per year, and (2) plaintiff would receive commissions of "„20% of the up front costs‟ revenues on all accounts brought in by [plaintiff] or through [plaintiff‟s] contacts or efforts."

So, the plaintiff was later fired and sought commissions for a transaction that occurred after he left, but which was (at least according to him) was "through plaintiff's contacts or efforts."

The court made short work of the plaintiff's argument that he was entitled to post-termination commissions. On plaintiff's breach of contract claim, the court held:


We agree with defendant that, on its face, the italicized language is reasonably susceptible to only one interpretation—that once plaintiff ceased to be employed by defendant, he would no longer be eligible for commission pay. While plaintiff could have relied on extrinsic evidence (if there were such evidence) to suggest an alternative meaning of this provision, he did not do so. (Compare Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1358 ["[T]his extrinsic evidence of trade usage exposed a latent ambiguity in the contract language and presented an alter[n]-ative interpretation to which the term „gross receipts‟ was reasonably susceptible in the circumstances."].) Accordingly, we conclude as a matter of law that the written employment agreement precludes plaintiff from collecting additional commissions post-termination.

On the plaintiff's claim under the Labor Code, the court said that although commissions are wages:

for purposes of enforcing the provisions of the Labor Code, "[t]he right of a salesperson or any other person to a commission depends on the terms of the contract for compensation." (Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1330; see also Steinhebel, at p. 705 ["contractual terms must be met before an employee is entitled to a commission"].) Accordingly, plaintiff‟s right to commissions "must be governed by the provisions of the [employment agreement]." (Steinhebel, at p. 705.) We have already concluded that, pursuant to the plain language of the written employment agreement, plaintiff was not entitled to any further commissions after he was terminated. Accordingly, defendant‟s failure to pay such commissions cannot constitute a violation of the Labor Code.

The court did not consider whether the commission contract was "unconscionable" because it was not pleaded. So, that door remains open in commission cases. However, the court also did not consider the question of whether commissions were "earned" before termination and therefore should have been paid. Presumably, that issue was not argued by the plaintiff. If your plaintiff makes this argument, this case could be distinguishable.

Finally, there is the argument that the employer fired the employee to avoid paying unpaid commissions. But the plaintiff waived that argument too. So, because this case was not as vigorously litigated as it might have been, be careful before you rely on it too heavily. On the other hand, the courts will enforce straightforward commission plans that contain contingencies on the right to payment, such as continued employment.

The case is Nein v. Hostpro, Inc. and the opinion is here.

DGV

Court of Appeal: How to Calculate Overtime on a Bonus

The First District Court of Appeal held that Costco properly calculated overtime on a production bonus in Marin v. Costco, opinion here.

I am frequently asked how bonuses and commissions affect overtime calculations. Basically, the "half time" (or whole-time in the case of double-time overtime) is due on the bonus, once the bonus is allocated to the hours that were necessary to generate it. You worked 1000 total hours including 20 overtime hours during a bonus period. The bonus is $2000. The incremental hourly rate is $2000/1000 hours = $2.00 per hour. That is the amount of wages on which no overtime previously was paid. So, you owe: 1/2 * $2.00 per hour * 20 overtime hours worked = $20.00.

Get it? The court of appeal did. That's the federal formula, and the formula the DLSE endorses. The court did not mention that California law endorses the use of federal overtime calculation rules. But it does. The plaintiffs wanted the overtime to be calculated by dividing the bonus over the straight time hours and then paying time and one-half on that figure. That would have resulted in double counting. In addition, it would have ignored the simple fact that the employee had to work all hours to earn the bonus - straight plus overtime.

So, if your eyes are crossed, welcome to wage and hour law. The opinion is linked above. It's got a detailed explanation of the rule and the arguments in favor and against.

Enjoy your holiday!

Greg