Employers Triumph in Bonus Proration Case

Robert Sommer was a financial administrator at Vanguard Group, eligible for a bonus under the company's "Partnership Plan," when he took an eight-week leave in December 2000 under the FMLA for major depression and anxiety. He returned to work in February 2001, but Vanguard prorated his bonus, reducing his payout by $1,788 based on the reduced number of hours he'd worked.

Three years later, after the company fired him, Sommer challenged the proration as a violation of his FMLA rights.

The 3rd Circuit's recent ruling denying Sommer's claim provides employment attorneys with long-needed clarification of Department of Labor (DOL) regulations on bonus payments to employees under FMLA protection. Because it is the only appellate decision on the subject, the decision in Sommer v. Vanguard Group is expected to be persuasive authority in other circuits.

The question of what to do about bonuses for employees who have taken FMLA leave comes up frequently, according to employment attorneys, because bonuses are now a major part of most compensation programs. The number of employers offering bonuses soared from 51 percent to 80 percent during the past 15 years, according to a recent survey conducted by Hewitt Associates.

"This decision will help a lot of employers with nitty-gritty questions that come up on a daily basis and maybe fly under the radar screen because they don't involve a huge amount of money," says Sarah Kelly, member of Cozen O'Connor.

Definitional Dichotomy

Many of those questions grew out of DOL regulations that differentiate between "production" and "absence of occurrence" bonus plans. Production bonuses "require some effort on the employee's part"--such as billing a certain number of hours or selling a certain number of products. Absence-of-occurrence bonuses reward an employee "for compliance with the rules." That usually means not doing something--such as not having a safety violation.

Although the regulations do not address the issue of prorating bonuses when employees take FMLA leave, the department's opinion letters suggest that production bonuses can be prorated, but absence-of-occurrence bonuses cannot. But the DOL has not provided any guidance on bonuses that don't clearly fall into either category.

"It has been a puzzle how to advise employers on the bonus issue because of the dichotomy the DOL set up between lack of occurrence versus production bonuses," Kelly says. "Many employers have bonus plans that do not fall into either category."

That was the case with the Vanguard plan. The amount the company distributes annually depends upon the company's operating performance, its competitors' operating performance, the performance of the securities markets, the investment performance of Vanguard funds and company earnings. To be eligible for the bonus, an employee must be on the payroll on the last day of the year, the date of the bonus distribution and every day in between. The amount an employee receives depends on job level, length of service and hours worked. Significantly, the company specifies that if employees don't meet the annual goal for hours worked--1,950 hours--their payments will be prorated and that "time spent on leave is not considered time worked for purposes of calculating your Partnership payment."

In his complaint, filed in the Eastern District of Pennsylvania, Sommer argued the bonus plan was an occurrence bonus designed to promote retention because it required an employee to work to the end of the year. He also argued that the program interfered with his rights under the FMLA because it discouraged people from taking protected leave. He sought class action status for his claim.

In August 2005, the district court granted summary judgment to Vanguard. The 3rd Circuit affirmed in August 2006. In his decision, Circuit Judge Ruggero Aldisert noted that it is "often difficult to sift through the jargon-laden terms of a company's bonus program to ascertain the goal actually being rewarded." But he concluded the Vanguard plan was closer to a production bonus than an occurrence bonus because it required employees to meet a goal of number of hours worked. The employer, he wrote, "may prorate any production bonuses to be paid to an FMLA leave taker by the amount of lost production ... caused by the FMLA leave."

The decision also noted that Vanguard did not single out FMLA leave-takers, but also prorated bonuses of people taking workers' comp, disability and jury duty leaves.

"This decision is very employer-friendly," says Linda Hollinshead, associate at WolfBlock. "It gives a lot of comfort that if employers try to objectify their bonus plans, they can prorate them for FMLA absences."

Unanswered Questions

But the decision still leaves unresolved questions because many bonus plans don't have objective, measurable goals. They may be based on "soft" criteria, such as employee support for management goals or leadership ability. And employers in most industries do not track hours of employees who are exempt from overtime pay.

"Where the decision does not help is that Vanguard had a specific threshold for employees," Kelly says. "For those employers that have a more qualitative, gestalt-type measure, then how you prorate is difficult to determine."

Employers who base bonuses on an employee's overall contribution without establishing a formula to evaluate performance run the risk of having employees claim that they received adverse treatment because they took a leave protected by federal law, argues Edward Cerasia, member of Proskauer Rose.

As a result, the best course for employers is to tie bonuses to quantifiable standards such as hours worked and to ensure all leaves are treated similarly, says Gregory Reilly, shareholder in Littler Mendelson. While more clarity from the DOL and courts would be helpful, don't expect the remaining questions to be answered anytime soon, he adds.

"This is another example of how, amazingly, there are still fundamental issues that have not been resolved, even though the FMLA became law in 1993," Reilly says.

Senior Editor

Mary Swanton

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