With the fourth quarter well underway, employers and employees may be anticipating annual performance bonuses. Occasionally, we receive questions from employers about their flexibility to change bonus plan terms based on unanticipated business circumstances. For example, the company’s financial forecast for the year has nosedived, resulting in a desire to reduce bonuses regardless of whether employees have met individual productivity goals. Unfortunately for employers, attempts to unilaterally change bonus plan terms may run afoul of state laws. 

Like most wage promises, a bonus plan is considered a contract, and failure to honor the terms of such plan can result in claims for breach. If an employee has worked the majority of the year in reliance on the terms of the bonus plan, last minute attempts to change those terms cannot be made without the employee’s consent. Even worse, bonuses are typically considered wages under state wage and hour laws, resulting in potential claims for liquidated damages and attorneys' fees on top of the bonus itself.

Some bonus plans attempt to evade these legal restrictions by including language explaining that payment of the bonus is always discretionary, and that the company reserves the right to unilaterally change its terms at any time. This exculpatory language may or may not have the intended effect depending on the individual circumstances, and the company’s past bonus payment practices.

Of course, there are no legal prohibitions against an employer making prospective changes to a bonus plan. However, changing the rules of the game towards the end of the bonus period raises the risk of legal claims in addition to a belief by affected employees that the company has unfairly deprived them of amounts they have already earned.

For more information, please contact me or your regular Parker Poe contact. Click here to subscribe to our latest alerts and insights.