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

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

Lisa McCormack
Title: VP, Client Services
Company:
(VP, Client Services, ) |

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.

Steve Belnap
Title: CFO
Company: Obeo, Inc.
(CFO, Obeo, Inc.) |

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.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

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

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

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

Best... Sarah

Mike Farrow
Title: CFO
Company:
(CFO, ) |

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,

Paul Moore
Title: VP of Finance
Company: PC Helps Support, LLC
(VP of Finance, PC Helps Support, LLC) |

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.

Erich Stolz
Title: Partner - CFO / CEO Practice
Company: TATUM LLC - A Randstad Company
(Partner - CFO / CEO Practice, TATUM LLC - A Randstad Company) |

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.

Charles Whittaker
Title: VP & Director - Taxes
Company: MidCountry Financial Corp
(VP & Director - Taxes, MidCountry Financial Corp) |

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.

Melanie Kaneas
Title: Independent Contractor
Company: Self-Employed
(Independent Contractor , Self-Employed) |

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.

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

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 responsibility 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.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

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.

J. Ed Neufer CPA
Title: Consultant
Company: CONSULTING
(Consultant, CONSULTING) |

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.

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

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!

Keith Taylor
Title: CFO
Company: Lyris, Inc.
(CFO, Lyris, Inc.) |

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.

Madeleine McBride
Title: Owner
Company: McBride Bookkeeping
(Owner, McBride Bookkeeping) |

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.

Topic Expert
Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

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.

J. Ed Neufer CPA
Title: Consultant
Company: CONSULTING
(Consultant, CONSULTING) |

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.

J. Ed Neufer CPA
Title: Consultant
Company: CONSULTING
(Consultant, CONSULTING) |

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

Topic Expert
Scott MacDonald
Title: President/Owner
Company: AlphaMac Resources, Inc.
(President/Owner, AlphaMac Resources, Inc.) |

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

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

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.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

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.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

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

Anonymous
(Finance Manager) |

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?

Mbulelo Siyothula
Title: Senior Personnel Officer
Company: KSD FET College
(Senior Personnel Officer, KSD FET College) |

Do you pa pro rata bonus to employees who have been on the employ of the company for only one or two months?

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

I would say "no" unless the plan so states. I've never written a plan that pro-ratas a bonus for departure (but I have done so for late arrivals).

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

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.

Brian Kennedy
Title: President
Company: peerformation.com
(President, peerformation.com) |

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

Jennifer Yap
Title: HR
Company: NCT PROPERTIES SDN BHD
(HR, NCT PROPERTIES SDN BHD) |

My companies is facing a lot of hit & run cases after the bonus payout and I would like to seek your advice for the followings:-
The employee tender his resignation letter the day after the money's in his account. Can an employer make an employee to pay back his bonus?
Is the bonus policy stands to include if the employee resign within a certain time after getting a bonus the employee has to repay the entire bonus?
Is It legally to include a clause stating the employee have to serve three or six months after getting their bonus?
Thank you & warmest regards.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Jennifer -

It sounds like your company has a lot more problems than just bonuses and payment dates.

To answer your questions, I would talk with corporate counsel who can help you interpret your States and Federal DOL rules applicability.

In addition, the more difficult you make it for a employee to earn a living, the less likely they will want to earn a living from your company; and it sounds like you want to make it very difficult.

Then I would seek out a management consultant to find out why you are having such a high employee turnover and need to resort to what many might consider draconian methods to "make them stay".

Jeff McGlaughlin
Title: Corporate Controller
Company: Withheld
(Corporate Controller, Withheld) |

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.

Pamela Wise
Title: Director/General Accounting
Company: The E.W. Scripps Company
(Director/General Accounting, The E.W. Scripps Company) |

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.

Anonymous
(Managing Director) |

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.

Tyler Tracy
Title: Vice President Finance
Company: Novasyte LLC
(Vice President Finance, Novasyte LLC) |

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.

Austin Funk
Title:
Company:
(, ) |

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.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Let me ADD one more thing that has not been mentioned in the thread (scanned through it)...

Performance bonus is usually at the discretion or approved by the Board/Shareholders. As such, they wont be able to make THE decision until year end financials are ready. SO depending on your company, the directors may not be able to see a final one until the first Board Meeting. That is one of the main reasons why the "declaration date" or cut-off date or whatever you call it is called for.

To answer your question and as others have said, it depends on the type of bonus, commissions = yes, performance = depends on policy and usually dependent on a "employed by" date (see first paragraph).

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