January 14, 2010

An Illinois appellate court recently ruled in McLaughlin v. Sternberg Lanterns, Inc. that employers must pay bonuses earned by former employees only if the employer made an "unequivocal promise" to the employee before employment ended.

For years, employers and employees have fought over the meaning of a section of the Illinois Wage Payment and Collection Act (IWPCA) governing so-called "final compensation" and "earned bonuses." The IWPCA requires that employers pay employees who are fired or who quit "final compensation," including "earned bonuses," wages, commissions, the monetary equivalent of earned vacation days and holidays, and other compensation due pursuant to an employment contract or agreement. The IWPCA, however, does not define when a departed employee has "earned" a bonus, because the right to such compensation depends on what triggers the bonus according to the contract, agreement or bonus policy.

The October 2009 Illinois decision marks the first time that a state appellate court has decided when a former employee is entitled to an earned bonus under the IWPCA. Previously, only federal courts had addressed the issue, and guessed that the Illinois Supreme Court would interpret the IWPCA to require employers to pay earned bonuses to departed employees only when the employer had unequivocally promised to do so in a contract, agreement or employment policy.

In McLaughlin v. Sternberg Lanterns, Inc., an Illinois appellate court confirmed the federal courts' guesses, ruling that a departed employee earns a bonus only when the former employer has made an "unequivocal promise" to pay such a bonus, and the employee has fulfilled all of his or her obligations to receive that bonus. The case involved an employee who sued under the IWPCA for a pro-rata share of his performance bonus, which he claimed he had earned before the employer fired him. According to the employee's contract, he would receive a bonus if he increased his sales by a certain percentage every year. The employee claimed that he was on track to meet that requirement before he was fired.

The state court, however, ruled that the employee's contract required him to meet certain sales goals for the entire year, not just a portion of it. The court distinguished this bonus structure from one based solely upon length of service, in which case the employee would have earned a pro-rata bonus. Ultimately, the court held that because the employer had not made an "unequivocal promise" to pay all or part of the bonus and the employee had not met the sales increase for the entire year, the employer had no obligation under the IWPCA to pay any part of the bonus.

Particularly in light of increased layoffs in virtually every sector of the economy, employers in Illinois should review their contracts and employee policies for such "unequivocal promises" to pay bonuses. The attorneys in Much Shelist's Labor & Employment group can add certainty to the potential cost of hiring or firing employees by providing further guidance on the IWPCA, as well as the ramifications of McLaughlin v. Sternberg Lanterns, Inc.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.