Contractual Bonus

Have You Satisfied the Contractual Condition to Get Your Bonus?

Are you clear on what you must achieve to receive your bonus? Either your employment contract or a bonus plan will state the conditions required before a bonus will be paid. Your employer decides the conditions beforehand.

At Gardner Employment Law, we closely examine employment contracts and bonus plans. We understand how essential your bonus compensation is to you.  If you need help, give us a call.

Eligibility For a Contractual Bonus

A contractual bonus is paid within the terms of a contract of service and cannot be withdrawn by the employer without legal consequences.  The employer can not change or remove the bonus terms from the contract unless the contract is amended. We explained the advantage of having an employment contract in Houston Employment Contract Lawyer.  However, many employees do not have a formal contract, and their bonus is based on a formula stated in a company plan.  In either case, you must reach certain goals or satisfy certain conditions in order to be eligible to receive the bonus. 

Clarity in how the bonus will be calculated likely will minimize areas of dispute. Nevertheless, disputes can still arise if the level of work expected can fluctuate or the employer sets conditions so high that a target amount becomes unattainable.

I handled a case recently in which the employee would have been entitled to participate in a profit-sharing plan, a type of recurring bonus payment, upon “outstanding” performance. At the year end review, his supervisor rated his performance as “outstanding” in almost every category but not all. The employee complained when he was not selected to participate in the profit-sharing plan, but the employer properly denied his participation. The controlling document was clear.  It stated “outstanding,” not “mostly outstanding.” In contract law, each word is important, and the courts construe the writing quite literally.

If you work for a small company or sole proprietor and there is a verbal “promise” of a bonus, you are running the risk that the employer may not remember the “promise” the same way you do or at all. It’s best to get the bonus terms in writing.

Can the Employer Change the Terms of a Bonus Plan?

If you have an employment contract stating the terms of your bonus pay-out, the employer cannot change the terms unless both parties agree to an amendment. As I’ve mentioned already, more commonly the company’s bonus plan contains the conditions or parameters for the pay-out of bonus funds. 

Any term or condition of employment in a bonus plan can be changed by the employer, so long as the employer first provides employees unequivocal notice of the upcoming change, as the Texas Supreme Court ruled in General Mills v. Hathaway. If the employee continues to work under the changed conditions, she or he is deemed to have accepted the change. Only if the right to the bonus is vested, that is, you fulfilled the specified conditions, will the employer be prohibited from changing the terms.

One might argue that bonuses fall under ERISA welfare benefits. However, there is a section in ERISA that exempts performance bonuses. ERISA does apply to bonuses that are deferred compensation, which usually higher level executives might receive. This is money that literally has been earned by the executive but the pay-out is deferred to a later date for tax strategies. If the compensation is already earned or if the right to receive the money is “vested,” under ERISA the terms cannot be later changed by the employer.

Various Types of Bonuses

Some employers offer discretionary bonuses, meaning that your employer decides who is and isn’t worthy of receiving a bonus, as well as how much the bonus earned will be. Obviously, this type bonus arrangement can be fraught with problems.  But if you have a benevolent and generous employer (and get along well with your boss), a discretionary bonus could be a great arrangement.

The most common type of employment bonus is the annual bonus. In some situations, an executive’s bonus structure is based on the company’s success for the preceding year, an incentive to maximize profits for the shareholders. This is an “incentive” bonus and usually based on the discretion of the company’s compensation committee.

Some bonuses are distributed quarterly, others in installments over several years. This latter type is a “retention” bonus because the company wants to retain you. Some bonuses are paid once, such as a signing bonus, others are recurring. It depends on many factors, including your role with the company, your level in the hierarchy, what you contribute, whether you are a revenue-generator, and philosophies based on the company you work for.

Another example of an incentive bonus is to encourage employees to take a certain action.  Amtrak, our American railroad company, currently is offering a cash bonus to their employees as an incentive to get the coronavirus vaccine. “Amtrak is giving a bonus, the equivalent of two hours of pay, to those who get vaccinated,” according to the Washington Post. The company also is offering paid time off for workers to get vaccinated during work hours and will excuse absences due to any side effects.

Can I Claim a Pro Rata Bonus Before the Year Ends?

A pro rata bonus is a payment that the employee would have earned for the entire year when the termination of employment occurred, but prorated to the time actually worked (an amount equal to the fraction found by dividing the number of days employed during the applicable performance period by the total number of days in the applicable performance period).

Many contracts will state that you are not entitled to a bonus payment if you do not work the full year or are not employed at the bonus payment date. Regardless of what your contract states, if you actually performed your services and you are terminated without cause, you are entitled to the pro rata amount of the bonus.  According to the Texas Supreme Court in Miller v. Riata Cadillac Co., when the employer prevents the employee from fully performing an entire year’s work, then the employee is released from her or his commitment. In that instance, the employee is entitled to the pro rata bonus.

A Lawyer Can Help

As one of our specialties, at Gardner Employment Law we analyze employment contracts and bonus plans, which sometimes are quite intricate. If you are unsure about your bonus clause, contact us!


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