Should annual bonus be paid to employee who resigns in January?

Mike Farrow's Profile

Should Annual Bonus Be Paid To Employee Who Resigns In January

If an employee has an annual performance bonus as part of their compensation and they resign in January (after working the full year) before the amounts have been paid out, is it common to not pay anything? This would not be for a commission based amount, purely for a incentive bonus based on performance. Thank you.

Answers

Member's Profile

Hi Mike,

Typically, if the employee terminates after the end of a defined bonus plan period (i.e. 12/31/10) they would be eligible to receive the full bonus because it would be considered "earned". I am assuming that this is not spelled out in the bonus plan document. If you don't have a detailed bonus plan document, I highly recommend that you put one in place that addresses what happens in the case of termination.

Please let me know if I can be of further assistance.

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Member's Profile

Mike,

I am reading into your question that the company does not want to pay the employee. I think not paying the employee would reflect poorly on the character of the executives if they do not pay the employee. This of course assumes that the employee performed and earned the bonus. Not paying the bonus out of spike because he/she resigns is bad form in my opinion.

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This CA Division of Labor Standards Enforcement Policies and Interpretation Manual brought to our attention by Keith Taylor, has some interesting insight:

http://www.proformative.com/resources/division-labor-standards-enforcement-policies-interpretation-manual

I hope that helps, at least how one state sees it.

Best... Sarah

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Member's Profile

Thank you for the responses. It is helpful to hear the perspectives and I agree it is important to recognize the performance over the year and pay a bonus.

cheers,

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Member's Profile

If you treat your employees this poorly, news will get out.

Consider this scenario: the employee had the offer in hand prior to his review, but didn't give notice until AFTER being paid his bonus, because he had good reason to believe that the Company would stiff him on his bonus. In this case, a policy of stiffing outgoing staff on their bonuses causes an employee to give less notice than they would give to a more reputable employer.

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I suggest to include a clause in the bonus agreement, like: If the employee leaves prior to 1/31/xx then the earned bonus for the previous year will not be paid. I would not want to leave an employee immediately at the beginning of the year.

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Member's Profile

If your bonus plan for the non-payment of a bonus to an individual who was employed through the end of the bonus period, your bonus accrual for the year may not be deductible till paid even if the bonus is paid within 2 1/2 months of the year end, as your accrual may not be considered fixed and determinable at year end for tax purposes. If you take the tax deduction on your return you may need to consider if this would be an Uncertain Tax position in accordance with ASC 740-10 as well as be disclosed to the IRS on new Form UTP.

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The bonus plans I have used clearly specified that employees be employed on 12/31 to be eligible for the bonus. Our severance packages for re-organized employees also paid a pro-rata bonus if the severance date was in the last 6 months of the year. Did we have people resign in January - sure but they contributed to our success and earned (and we accrued) their bonus.

I see bonus as no different than paying a supplier. Employees provide intellectual capital. If you had an invoice from a supplier accrued as 12/31 and changed suppliers in January would you not pay them because they are no longer your supplier? I think not. Why treat employees differently?

My recommendation - specify the date to which you must be employed (unless severed as part of a re-organization) in the bonus plan document.

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Member's Profile

Mike -- First, you're in Walnut Creek, CA, and so I assume subject to California wage laws. Next, you asked "Is it common?" Did you mean, is it legal (in California)? or is it ethical? or is it good business/hr practice? The respondents seem to be answering different interpretations of your question (aka the elephant and the blind men).

LEGAL: I beg to differ with Lisa who implies it is legally "earned" if they employee is employed at year-end.** I think what you will find is that most companies that have good hr, finance, and/or legal leadership, publish bonus plans in a formal bonus plan document, which typically states that the employee must be employed on a certain date AFTER the earning period in order to be eligible to receive the payout.**

This provides the company with legal (CA govt regulatory) protection/defense from employees claiming that they should be paid pro rata if they leave any time during the plan year, and in many, many companies (including highly regarded F500 companies), even if the employee leaves prior to the payout date (which usually is set to occur sometime after yearend but prior to the 75 day tax-accrual-eligibility-cutoff date).

As long as the company is consistent in their execution of the plan (i.e., pay everyone who VOLUNTARILY leave after the end of the plan year but before the payout date), then the CA DLSE rules support the company from not being required to pay any bonus.

ETHICAL: Many of the respondents appear to believe that if the employee works the COMPLETE year (assuming they "earned" a bonus) then there is an ethical responsibility for the company to pay the employee. Generally I agree, but what about the employee who voluntarily leaves in October -- didn't they earn 3/4 of the year's bonus? Isn't it the ethical responsiblity to pay pro rata? Or what about the employee that leaves in February? 2/12 owed? This is a slippery slope... Did you tell employees the rules? Did you provide them the document, review the terms, and get their signature? Did you explain that they wouldn't receive a payout if they left prior to the payout date? Good HR/Finance/Legal leadership defines the rules, adheres to them, and ensures the employees are treated fairly and in accordance with the agreement.

HR: "If you treat employees poorly, word will get out.", and you will not attract the best talent... I agree. Good HR leadership encourages to treat employees fairly, by communicating effectively. Adopt policies that are fair, well defined, well communicated to the employees. Make sure that they are accountable for producing results, then pay them. Thus, some companies adopt a practice of paying out bonuses earned by employees who remain employed for the full plan year but voluntarily terminate before the payout date. The company has legal protection from not having to pay the bonus at the same time as final wages are legally due (many operational, legal, tax, cash efficiencies.)

Keith

** Here is an excerpt from the California DLSE (Division of Labor Standards Enforcement)

Sec 35: Voluntary Termination Before Vesting Where Bonus Is Consideration For Continued Employment.
An employee who voluntarily leaves his employment before the bonus calculation date is not entitled to receive it if the employer has expressly qualified its promise of a bonus on a requirement of continued employment. The California rule is in accord with the prevailing view that where a definite bonus or profit-sharing plan has been established and forms part of the employment contract, the employee is not entitled to share in the proceeds where he leaves the employment voluntarily prior to vesting.

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Proformative Advisor
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In addition to Keith above and Ed below;

If your plan says "must be employed through 2/28", then it is *not* owed, it is *not* ethical to pay (as you're violating your own contract, endangering enforceability of your other employment contracts, and generally not acting with fiduciary responsibility.), and you're in no way bound to pay.

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