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

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.

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,

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.

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.

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.

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.

Rules should be spelled out regardless so that interpretation/judgment is reduced or not involved at all. My guess in this case is that the person earned the bonus and whether they quit or were terminated subsequent to year-end they should be paid the bonus. When people exit a company, there are often multiple reasons. If they're terminated, they typically have a severance agreement describing terms. If they quit, a company or certain personnel can be mad if they want but earned compensation must (should) be paid. Nonnegotiable, unless it's a vindictive company known for retaliation. It's a free market, and people are allowed to enter and leave as they wish, and the company is typically allowed to hire and fire at will. If the company wants the person back, all it has to do is make it worth their while, but if the company fired them or did something illegal/unethical...well there's probably a premium to be paid.

Your case is clearly an incentive bonus and if the earning period was for the year ended December 31, and the performance criteria were met, then the bonus is earned and payable regardless of how long the employee continues to work. There may be some scope for delay depending on the definition of the bonus, for example until the profit for the year has been audited if the bonus is to be paid as a % of profits. There is an alternate bonus consideration, that of employee retention. In this case it makes sense to delay the payout until several months into the following year pending calculation, board approval etc, as this will allow the employee to get hooked into the following years bonus plan. A plan that is earned and paid promptly at year end means that your employees will be looking at this date as the window for job change since they have nothing at stake at that time!

Dear Simon,
Please qualify your comment as "what you feel is the right thing to do".

I AGREE -- It is fair and ethical to expect that if it is earned, then the company SHOULD pay it.

HOWEVER, CA Law is clear -- it is not legally owed. I will restate California Employment Regulations:
** Here is an excerpt from the California DLSE (Division of Labor Standards Enforcement) - you can find the full doc at
http://www.dir.ca.gov/dlse/DLSEManual/dlse_enfcmanual.pdf

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.

I think Keith's comments are exceptionally important. If this is a Legal issue, regardless of how corporate leaders may or may not "feel," they must follow the law. Keith has quoted us the law so unless some other expert has any further information, I think we're finished here.

In my experience, the "bonus calculation date" was established as 3/1, therefore, everyone knew that if they wanted their bonus, they had to start their new jobs after 3/1. And that is EXACTLY what they did!

This is actually a good thing to keep in mind if you're looking for work. A lot of vacancies come up at senior levels during the first three months of the year because execs want to ensure that they get their bonuses before they resign.

Interesting thread here - it highlights the difference between law and morals:).

My view on "owners must follow the law" is that "owners may not do less than what the law requires;" i.e. the law is the minimum standard. There is no law that says "you cannot do better than what the law requires" - just look at CxO compensation contracts for example.

Would you really want to work for a company where the threat of a bonus clawback has nothing to do with your performance already delivered against the bonus contract? As someone commented earlier, it says a lot about the character of the executives of that company.

I'm sure there are unethical companies looking to claw back when they have no right whatsoever, even when they send hard documentation out. Like you said, Len, character and reputation. I could go on to list 8-10 things I'm sure.

Hard documentation that conflicts actually. Settling on something can be good if no resolution exists.

It should be paid. Period. Ethically and morally it has been earned.

I agree with Scott, and others who have outlined what bad internal PR would be caused by not paying the bonus.

Management leads by example, and conflicting, arbitrary and capricious actions are the best way to kill morale, which in turns kills productivity, etc.

It is often said that emotions must be removed from negotiations; the same is true of most business decisions. When emotions enter the decision making process, that process is skewed, often to the detriment of the decision maker.

I agree with Keith. If the plan document states that you must be employed at X date in order to receive the bonus, then you forfeit the bonus by leaving voluntarily before that date. If you are following best business practice, then there should be a written plan document, which clearly states who is bonus eligible, how the bonus is calculated and when it is earned and paid.

If that is the case, then the accountant in charge of accruing the bonus knows what to accrue, and when to reverse an accrual when an employee leaves voluntarily before the date specified in the plan. That is the price of changing jobs.

If the employee is leaving not by choice, then the plan document should also specify what happens when an employee is terminated for cause. If the employee is laid off, then their separation agreement should cover what happens with their bonus.

The important thing is to have a plan document, and to treat everyone consistently as a result.

Echoing Kevin, Wayne:
-Assuming you are past the legal and ethical issues (which should be reasonably clear at this point)....

What do you want to do next time, ignoring this particular instance and looking at the general case? Let's say the person is a flake and you're glad to see them go...fine, but would you want to do the same for a person who was very productive in the past year?

While the payment is retrospective, the purpose is in part prospective for your current employees. Make sure you don't undermine that.

KP

I am concerned with what Charles Whitaker said, could not paying the payments to the terminated employees, make the accrual not eligible as a deduction on taxes because they are not fixed and determined at close of the books for that year?

Everywhere I have been we did not pay a bonus if the employee left before they left. You need to make sure this is delineated in the compensation plans. In other words, document it and communicate it so you aren't sued.

That would be pretty bold to leave before the bonus has been put in the bank.

If you're not employed with the company on the date that bonuses are paid, then there's no obligation for the company to pay it to you (ignoring, of course, any legal requirements to pay). If you work half a year, you wouldn't not expect half your bonus. If you quit in November, you wouldn't expect to be invited to the company Christmas party. As an employee, I would not expect my bonus payout if I voluntarily left before the payout happened.

It depends on what your company policy is in paying out bonuses. At our company, we receive a letter with the terms of the bonus payout. The terms include having to work the full calendar year. As long as that is done and you meet your bonus goals, you would receive you bonus.

My firm requires that the employee be employed "in good standing" on the date of bonus payment. Moreover, our bonuses have a clawback provision if a person leaves to join a competitor. That clawback has a FOUR YEAR tail. I would certainly prefer the structure that the majority have described.

All of this should be spelled out in the plan. All of my work places have been explicit and say if you are not employed with the company at the time of payment, you are not entitled to the payment. Commission is different.

If a bonus is commission related I can see paying it out if an employee leaves. If it is however an employee performance incentive bonus it makes no sense to me to pay it out to someone who is no longer an employee that is being incentivized. The incentive reward is not just relating to what hey did previously but also how they will perform in the future.