Several years ago, we received a call from a client’s vice president of human resources who was facing an unusual problem. The company had a regional salesperson who was having an extraordinary year. In fact, his sales were so large that it appeared that he would end up as the highest paid employee in the company for that year, even exceeding the CEO’s compensation. This circumstance was causing major political problems within the company, and the vice president called to ask whether the company could retroactively change the commission plan or cap the salesperson’s commissions to avoid this outcome.
Unfortunately, the company did not like the legal advice we provided. However, this guidance was echoed earlier this month in a decision from the Eighth Circuit Court of Appeals. In Boswell v. Panera Bread Co., Panera put into effect a store management retention bonus plan that would pay managers based on a bonus formula after five years depending on the store’s performance. Soon after the bonus plan was announced, Panera decided that it would be too expensive and attempted to impose a cap on the maximum bonus paid under the plan. One manager filed a class action breach of contract claim challenging the cap, and the district court agreed, concluding that it was an unenforceable change to a unilateral contract.
On appeal, the Eighth Circuit agreed, affirming the decision. Under Missouri law, once an employer makes a wage promise to an employee, it cannot revoke or modify that promise if the employee has already begun performance based on the promise. Panera tried to argue that the contract became bilateral and subject to amendment when the bonus plan was later incorporated into employment agreements with the managers. However, the court rejected this defense based on employment status at the outset of the bonus plan.
Although this decision was based on Missouri law, similar contract principles apply in most states. In addition, in many states these claims could also be brought under wage and hour statutes, which impose liquidated damages and attorneys’ fees remedies. Even if the bonus plan contains language that gives the employer the ability to modify its terms during the performance period, attempts to reduce the plan can result in claims from employees that the employer is legally bound under the original promise.
From one perspective, the employer should benefit if employees outperform expectations under a commission or bonus plan. Any compensation plan should be carefully designed with these possibilities in mind. Legally it is much easier to address these contingencies at the outset of the plan instead of attempting to correct unexpected performance once the plan is already in effect.