Monday, April 13, 2015

Dispelling the Bonus Illusion?

New ImageA recent case out of Ohio, Pohmer v. JPMorgan Chase Bank, N.A., may cause some scurrying around among employer counsel as they try to plug procedural holes which may have allowed a former employee to end-run the employer’s rather elaborate (and typical) rules regarding awards of bonuses.  The basic fact scenario is common – plaintiff discharged (in this case for apparently good reason) before any bonus was due.  I use “due” loosely since JPMorgan Chase’s Bonus Plan was excruciatingly clear that any bonus, and the amount thereof, was in its sole discretion, and, in any event, an employee had to still working when bonuses were paid to receive one.

 The plaintiff’s rather clever ploy was to sue for quantum meruit and unjust enrichment because plaintiff had conferred value on his former employer, for which compensation was due. Like most financial services firms, JPMC had a practice of awarding bonuses, and, in fact, plaintiff had received one each of the previous 13 years. But plaintiff had never been provided a copy of the Bonus Plan, much less assented to be bound by it, and so claimed a right to quantum meruit and unjust enrichment recovery free of its constraints.  

 The court agreed, reversing summary judgment for the bank. While acknowledging that neither quantum meruit nor unjust enrichment applies “when a contract exists between the parties covering the same subject,” it rejected the trial court’s conclusion that the Bonus Plan was such a contract. Since the Plan was “explicit that the decision of whether to award bonuses and in what amount rests entirely in the discretion” of the employer, it was an illusory contract, binding neither party.  

 The court hastened to add that such plans need not always be illusory – if executed in connection with gaining or continuing employment, such a plan would presumably be supported by that consideration. Plaintiff, however, had not executed a document regarding the Plan nor even been made aware of its terms and so could not be said to have assented to its terms in exchange for continued employment.  For that reason, summary judgment for the employer was reversed.

 Pohmer is only an intermediate appellate decision, but it does cast into doubt the practice of generally disseminating compensation policies rather than requiring express employee assent to them. Further, it is by no means clear that the plaintiff will prevail on remand since the appellate court spent little time analyzing the core claims of unjust enrichment and quantum meruit, and it it’s not so clear how either theory would work in this setting. 

 The plaintiff was paid a salary for his work for JPMorgan Chase, and either theory would have to take that reality into account. That’s clearest with unjust enrichment. Assuming that plaintiff’s efforts in fact enriched the defendant, what’s unjust about it retaining that benefit when it bought and paid for the very efforts that enriched it?  Plaintiff will argue that he worked harder to obtain a bonus, but – Bonus Plan aside – we would not normally think an extra-zealous employee is entitled to compensation above and beyond his agreed rate for such efforts, even when they bear fruit.  Much the same could be said of the quantum meruit theory. And that’s entirely aside from what remains of contract law’s preexisting duty doctrine.

 But what about the employer’s practice of paying bonuses?  Plaintiff can be expected to argue that that gave rise to an implied promise (terms of the unknown Bonus Plan aside, of course) that “extra” or “better” work would receive extra compensation. Indeed, bonus systems exist to motivate employees to work harder, and companies like JPMC (especially in financial services where bonuses can approximate yearly salary) clearly expect the prospect of the pot of gold to trigger better work. Further, the structure of the Bonus Plan is a classic example of an employer trying to have its cake and eat it too: the prospect of a bonus motivates employees but no single employee has any legal right to it. So long as the employer’s practices do not appreciably undercut those expectations, it can have the best of both worlds. And not paying a bonus to a former employee like Pohmer, one discharged for apparently good reason, will not impair the firm’s reputation for paying bonuses.    

 So do unjust enrichment or quantum meruit justify recovery where an employer’s practices imply a bonus, which expectation is not effectively disclaimed by some binding contract?  The Restatement (Third) of Restitution provides some hints: Section 31 deals with contracts that are unenforceable for some reason, including indefiniteness, and Illustration 4 would allow an agent to recover for the value of his services when he was promised a bonus but there was no way to calculate its amount.  The measure of recovery would be the market rate of services, less (of course) the salary paid.  In the Illustration, however, there was an express agreement to pay a bonus, see also Ill. 15, while in Pohmer’s case any such agreement would depend on finding an implied promise arising out of past practice.

CAS

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