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Does an employer have to pay out the bonus earned for prior year results if an employee is terminated prior to the bonus pay out date?

Dan Dekker's Profile

If terminated 2/18 and the employer has a policy that en employee must employed on 3/15 to be eligible for bonus pay out, even though the bonus was for the work performed and results of FY12, which ended 12-27-12 final paycheck advice statement was dated 2-18 for period of 3/1-3/31 included a Paid time off lump sum payout and vacation hours for prior year? Side note the company didnt pay out the final expenses owed until 3-30, overcharged on car allowance, and health benefits.


Topic Expert
Henry Schumann
Title: Manager FP&A
Company: Allscripts
(Manager FP&A, Allscripts) |

The question of "have to pay" is a legal one and depends on things such as whether there is a formal documented plan and if so, what are the terms of the plan. In addition, state laws could be a factor (whether the company is in a right to work state). And also, if the termination was for cause or not for cause could also enter into the legal position of whether the employer "has to pay".

Tangentally, it is probably a good practice to pay out the bonus earned to show the remaining employees eligible for the bonus plan that the company values their efforts and rewards work that achieved the goals that led to a bonus payout. It can be very disheartening to employees to set up a bonus plan that results in no payout more often than not.

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

I agree with Henry - the formal documentation on the plan and how that has been communicated to employees is going to be the deciding factor. I have authored and been subject to plans of this nature, requiring staff to still be employed at the time of the payout trigger date. These dates are typically there to provide management or auditors time to validate reporting results, especially when plans are tied to EBITDA or net income figures (e.g. through an issued audit report). You are in a much stronger position legally if you have a documented and published plan. Without such, it can become a battle with a terminated employee, as these qualifying issues can be subject to interpretation by opposing parties.

Rex Jackson
Title: EVP and Chief Financial Officer
Company: JDS Uniphase
(EVP and Chief Financial Officer, JDS Uniphase) |

Henry and Paul have covered this pretty well, but I'd add one last clarification: the big key here is when the bonus is "earned." If you don't have any contractual or plan language saying the bonus is earned as of the end of the fiscal year, and make it very clear in the policy as you've stated that the employee must be an employee in good standing at the payment date, you should be on solid ground to withhold payment.

Assuming the documents favor your position, you should avoid setting a precedent that you pay the bonus notwithstanding the terms of your own policy. If you decide to pay it, make sure you use the policy as the basis on which to insist on a full contractual release of all claims the employee may have against you (since you would argue you are doing something you do not have to, which becomes consideration for the release).


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