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Bonuses: When Are They 'Wages' Under New York Labor Law?

EMPLOYERS IN New York frequently face claims by their former employees for unpaid discretionary bonuses under Article Six of the New York Labor Law. In the past, former employees have asserted such claims even when the bonus arrangement expressly conditions the payment obligation upon continued employment on the date the bonuses are to be paid.

   Specifically, such former employees have asserted that the employer's failure to pay a bonus constitutes a failure to pay "wages" upon termination of employment under N.Y. Labor Law @ 191 and/or @ 193.

   Last year, in Truelove v. Northeast Capital & Advisory, Inc., 738 N.E.2d 770 (N.Y. 2000), the New York Court of Appeals severely weakened any possible claim for unpaid bonuses under both @@ 191 and 193 by holding that discretionary bonuses that are dependent solely on the employer's overall financial success are not "wages" under Article Six. Additionally, the Truelove Court held that employers may predicate bonus payments upon an employee's continued employment at the time payment is due, and that an employee has no "vested right" to a bonus under Article Six solely because the employer has announced that a bonus will be paid and calculated the amount.

   Following the Truelove decision, employers enjoy greater protection when they deny discretionary bonuses under their bonus policies and practices. However, the more recent decision of Fiorenti v. Centr. Emergency Physicians, No. 17813-00, 21-180, 2001 WL 409724 (N.Y. Sup. March 30, 2001) confirms that protection from liability for nonpayment of bonuses is not absolute, and will depend on a close analysis of the specific bonus arrangement at issue. In contrast to Truelove, the Fiorenti Court denied a motion to dismiss a cause of action brought by two employees to recover unpaid bonus payments from their employer and its sole shareholder under an unspecified provision of Article Six. The Court distinguished Truelove because the bonus arrangement at issue was neither discretionary nor based upon the employer's overall financial success, but rather based on an objective standard and each plaintiff's individual contributions to the business.

   In this month's column, we analyze Truelove and Fiorenti in order to illustrate when employers are justified in refusing to make bonus payments under Article Six of the Labor Law on the ground that such payments do not constitute "wages" under the statute.

   Article Six of the Labor Law sets forth a comprehensive set of statutory provisions, which protect the rights of employees to be paid their wages. For example, Labor Law 193(1) states: "No employer shall make any deductions from the wages of an employee...." n1 In addition, Labor Law @ 191(3) requires that upon termination of employment, employers must pay employees their "wages not later than the regular pay day for the pay period during which the termination occurred...." Under @ 190(1), "wages" is broadly defined as "the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis." n2

   If an employee prevails on a wage claim under Article Six, the employer will be liable for costs and attorney's fees, and if the employer's failure to pay wages is found to be willful, then the employee may recover liquidated damages in the amount of 25 percent of the total amount of wages found to be due. n3 Moreover, an employer, as well as the officers and agents of any corporation, who knowingly commits a wage payment violation may be subject to criminal penalties and fines. n4

   Over the years, New York courts have recognized several important defenses to employee claims for "wages" under Article Six. For example, in Gottlieb v. Kenneth D. Laub & Co., 626 N.E.2d 29 (N.Y. 1993), the court held that an employee cannot recover liquidated damages and attorney's fees available under @ 198 on a common-law breach of contract claim against his employer. Rather, such remedies are only available for violations of the substantive provisions of the Labor Law, such as @ 191. n5 Another potential defense available to employers, to which New York courts have come to varying conclusions, is that highly compensated salaried employees cannot assert claims for unpaid wages. n6 Such a defense will remain a possibility until the New York State Court of Appeals decides the question of whether a high level executive is an "employee" entitled to the protections of Article Six. Finally, as discussed below, there now exists a defense that certain kinds of bonuses are not "wages" as defined in Article Six under Truelove.

The 'Truelove' Decision
  In Truelove, plaintiff William B. Truelove Jr. was hired as a financial analyst in June, 1996 by Northeast Capital & Advisory Inc. (Northeast), an investment banking firm. Pursuant to Mr. Truelove's compensation arrangement with Northeast, Mr. Truelove received an annual salary of $ 40,000, and was also eligible to participate in a bonus/profit sharing pool. His offer of employment stated that a "bonus, if paid, [would] reflect a combination of the individual's performance and Northeast Capital's performance." Two memoranda from Northeast's CEO further explained that: 1) the bonus/profit sharing pool would be established only if Northeast generated certain stated minimum revenues and,
once established, would be calculated based on a graduated percentage schedule of firm revenues; 2) the bonus distributions would be allocated in the CEO's sole discretion; 3) the payments would be paid in quarterly installments, with each payment contingent upon the recipient's continued employment at Northeast; and 4) employees were required to have an "acceptable" performance rating to be eligible for participation in the bonus pool.

   At the end of 1997, Northeast established a bonus/profit sharing pool of $ 240,000 based upon its revenue for that year -- $ 160,000 of which the CEO allocated to Mr. Truelove. Mr. Truelove resigned from Northeast after receiving an initial payment of $ 40,000. Following his resignation, Northeast refused to make any of the subsequent bonus payments. Mr. Truelove sued to recover the remaining installments of his bonus, alleging that his bonus constituted "wages," and that Northeast's failure to pay violated Labor Law @ 193.

   The dispositive issue for the Truelove court was whether Mr. Truelove's bonus compensation constituted "wages" within the meaning of New York's Labor Law. After recognizing that other courts had interpreted the statutory definition of "wages" as excluding "incentive compensation based on factors falling outside the scope of the employee's actual work," n7 the court concluded that Mr. Truelove's bonus payments were not "wages" under the statute.

   The court reached its conclusion based on two key factors. First, the bonus  compensation plan was not predicated upon Mr. Truelove's own personal productivity, and did not confer upon him a contractual right to bonus payments based upon his productivity. Rather, the bonus pool was "dependent solely upon his employer's overall financial success." The second factor emphasized by the court in determining that Mr. Truelove's bonus payments were not "wages" was that his share in the bonus pool was entirely discretionary and subject to the non-reviewable determination of his employer.

   Accordingly, the court held that "[discretionary] additional remuneration, as a share in a reward to all employees for the success of the employer's entrepreneurship, falls outside the protection of the statute."

Bonus: No Vested Right
  As an additional ground for recovery, Mr. Truelove argued that he had a "vested right" to his bonus once Northeast announced that a bonus would be paid and had determined the amount of that bonus. The Truelove Court disagreed in light of controlling precedent, which held that an "employee's entitlement to a bonus is governed by the terms of the employer's bonus plan." n8 Mr. Truelove's bonus plan expressly conditioned receipt of his quarterly bonus payments on his continued employment at Northeast, and therefore, the terms of that plan controlled. Thus, employers may condition payment of a bonus upon continued employment at the time the bonus is to be paid, even when the employer has
already declared that the bonus will be paid and determined the precise amount.

'Fiorenti' Compared
  The very recent holding in Fiorenti, supra, is a clear indicator that New York courts do not view Truelove as barring all causes of action for wages by an employee under the Labor Law to recover payments under an incentive compensation plan. Indeed, the case demonstrates that the particular plan will be closely scrutinized to determine whether bonus payments are discretionary, and whether such payments are predicated upon the success of the employee or the employer.

   At issue in Fiorenti was a bonus compensation plan set forth in a contract between two plaintiffs and their employer, Central Emergency Physicians PLLC (CEP). Pursuant to this contract, plaintiffs, as employees, provided emergency room services to CEP. After allegedly not receiving bonus payments during a two-year period of their contract, plaintiffs sued CEP under the Labor Law n9 for wrongfully "withholding" wages. Relying on Truelove, CEP moved to dismiss the cause of action, arguing that payments under plaintiffs' incentive compensation plans were not wages because the plans were dependent on CEP's profitability.

     The Fiorenti Court first closely examined the Truelove decision, noting its narrow finding that bonus payments, which were within the discretion of the employer and dependent on the employer's success, were not wages under the Labor Law. n10 "It follows," the court stated, "that a compensation scheme which is predicated upon an employee's personal productivity and the objective success of the venture -- not the employer's discretion or any subjective standard -- is a contractual right of the employee."

Compensation Defined
  The court next examined the specific language of the bonus plans at issue, which stated, in pertinent part:

   Compensation -- A bonus amount in addition to the guaranteed hourly rate will be determined by establishing the Relative Value Unit (RVU) of the Employee from billing reports maintained from Medical Data Processing after the operating costs of C.E.P. are deducted. The physician's RVU shall be divided by the RVU for the total practice and multiplied by the net practice revenues exceeding expenses.... The bonus shall be paid biannually on June 30th and December 31st on each respective year. The physician, upon request, may inspect the books and records of C.E.P. with regard to the net RVU and expenses.

   In examining the bonus plans, the Fiorenti Court noted specific contractual language, which specified that a bonus amount "will" be determined based upon a set formula and that C.E.P. "shall" pay the bonus. Despite C.E.P.'s argument that its incentive compensation plan was dependent on its own profitability, the court determined that the bonus formula took into account the employee's personal productivity, noting that productivity was based on the individual's proportional contribution to the overall billing of C.E.P. As the Fiorenti Court stated, "[the] standard to be applied for entitlement to a bonus is objective and not subject to C.E.P's discretion or whim." Accordingly, the court denied
CEP's motion to dismiss, and upheld plaintiffs' cause of action for wages.

  The Truelove and Fiorenti decisions indicate that employers facing claims from their current or former employees for bonuses under incentive compensation plans are not subject to Article Six liability under circumstances in which the bonus payments cannot be characterized as "wages" under the law. The Truelove Court emphasized that employers are not liable under Article Six when: 1) the establishment of the bonus pool to be distributed to employees is entirely depended on the employer attaining a specific financial goal; and 2) payments under the plan are within the employer's discretion. As made clear in Fiorenti, employers who wish to ensure that their incentive compensation plans come within the Truelove safe harbor should closely examine the terms of such plans to make certain that a discretionary element is included.

n1 As an exception to this rule, employers may deduct amounts for "insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization, and similar payments for the benefit of the employee," provided that the employee authorizes such deductions in writing. See N.Y. Labor Law @ 193(1)(b).

   n2 The definition of "wages" also includes "wage supplements," which include "reimbursement for expenses; health, welfare and retirement benefits; and vacation, separation or holiday pay." See Labor Law @@ 190(1) and 198-c(2). However, a @ 191(3) cause of action cannot be asserted for non-payment of wage supplements. See N.Y. Labor Law @ 190(1).

   n3 See N.Y. Labor Law @ 198(1-a).

   n4 It is a misdemeanor for the first wage payment offense and a felony for the second offense, and such violations can result in fines and/or imprisonment. See N.Y. Labor Law @ 198-a.

   n5 N.Y. Labor Law @ 191, entitled "Frequency of payments," sets forth various time periods in which employers are required to pay wages.

   n6 Compare Daley v. Related Companies, Inc., 581 N.Y.S.2d 758, 760 (1st Dept. 1992) ("executives are within the class of employees protected by @ 198(1-a)") with Conticommodity Services, Inc. v. Haltmier, 416 N.Y.S.2d 298 (2nd Dept. 1979) (account representative acting in an executive capacity was not covered by N.Y. Labor Law @ 193).

   n7 See Int'l Paper Co. v. Suwyn, 978 F.Supp. 506, 514 (S.D.N.Y. 1997) (holding that bonus award was not "wages" because bonus was not based on employee's own performance, and actual payment of the bonus not guaranteed as a term of employment); Tischmann v. ITT/Sheraton Corp., 882 F.Supp. 1358, 1370 (S.D.N.Y. 1995) (holding that a bonus was not "wages" because employer was permitted to determine what amount, if any, should be paid to a participating employee in addition the regular guaranteed salary).

   n8 See Hall v. United Parcel Serv., 555 N.E.2d 273, 279 (N.Y. 1990) (where employer's written bonus plan expressly provided that bonus rights accrue upon the delivery and receipt of a Notice of Participation, and plaintiff was approved for and scheduled to receive such a Notice, but resigned from his employment prior to actually receiving a Notice, employer was not required to make the bonus payment).

 n9 The Fiorenti Court's opinion does not indicate the specific statutory provision that plaintiffs alleged was violated by CEP's alleged "withholding" of wages.

   n10 The Fiorenti court summarized Truelove's holding as follows: "... a bonus scheme, the payment of which was within the employer's discretion; predicated upon a combination of individual performance and corporate performance; and then based on the firm generating a set amount of revenue and establishinga bonus/profit sharing pool, was not a wage within the contemplation of the Labor Law."

This article is reprinted with permission from the June 4, 2001 edition of New York Law Journal. Copyright 2001 NLP IP Company.