Structuring an Employee Bonus Program

Employee bonus programs are a great way to incentivize work performance and improve job satisfaction. But employers planning to implement a bonus program should bear in mind the legal implications of doing so and seek advice from an experienced employment attorney.

One legal implication to consider is whether an employer’s regular payment of the bonus will create an implied agreement that the bonus is part of the employee’s wage.  While discretionary bonuses are generally considered gratuities and not wages, if the bonus is given regularly so as to create an expectation that it will continue, then it may be considered a wage under an implied contract.  Specifically, “to be considered compensation, a discretionary bonus must be given regularly to create an implied contract and reliance, otherwise it is a mere gratuity.” Byrne v. Courtesy Ford, Inc., 108 Wn.App. 683, 690–91, 32 P.3d 307 (2001).

An example of a regularly paid bonus being deemed a wage can be found in the Washington appellate case Simon v. Riblet Tramway Co., 8 Wn.App. 289, 505 P.2d 1291 (1973). In Simon, an engineer was paid a small monthly salary but received a large discretionary bonus at the end of each year which constituted approximately 68% of his total compensation. The engineer’s employer regularly paid the bonus every year during the engineer’s ten-year employment, and each year the bonus would increase regardless of company profitability.  The court found that under these circumstances, the course of dealing between the employer and engineer had created an implied agreement that the bonus would be paid as part of the engineer’s wage. When the engineer voluntarily quit his employment, he was entitled to the pro-rata share of his annual “bonus.”

In contrast, a recent Washington case shows when an annual bonus will be treated as such instead of being deemed a wage.  In LaCoursiere v. CamWest Development, Inc., 289 P.3d 683 (2012), the employment contract at issue identified the employee’s bonus as discretionary and provided a formula for determining the amount of the bonus, primarily based upon employee productivity and company profit. The employee only received a bonus during three of the four years he worked for the company, and the size of the bonus fell each year. The court held that “[u]nder these circumstances, the bonuses were mere gratuities: they were not given regularly, did not create an implied contract that they would be paid every year, and [the employee] could not have relied upon them, given he knew [the employer] had no obligation to provide them.” Further, the court found that diverting a portion of the bonus into a profit sharing plan did not violate Washington’s Wage Rebate Act, RCW 49.52 et seq., since the employee had voluntarily agreed to invest a portion of his bonus into the profit share plan.

When preparing to design your company’s employee bonus program, consult with our experienced employment law attorneys so that your bonus program is appropriately tailored to the unique circumstances affecting your business.

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