The law regarding an employer’s obligation to pay contractual bonus amounts received significant clarification in a recent Rhode Island case. Why this is important is that Wage Act violations are subject to mandatory double damages plus attorneys’ fees, and can even result in treble damages for egregious or repeat violations. Rhode Island’s Wage Act defines “wages” broadly, to include far more than base salary or hourly compensation. Indeed, “wages” can include a wide range of variable compensation metrics including commission-based and other methodologies. While the Act does instruct that a bonus “in addition to the payment of wages” does not constitute wages, bonuses may be deemed to be covered wages when they represent compensation for services rendered.
In this recent case, the Rhode Island court held that the language of an employment agreement, which provided that performance-based bonus payments were not discretionary, meant that they were wages under the Act. Based on this new guidance, courts will likely look closely at enforcing bonus language in an employment agreement, and subjecting those bonus amounts to double or treble damages. When designing bonus structures, what gets written must reflect what is intended. If a bonus structure is to be discretionary, that must be made clear. Likewise, employers should recognize that a rash decision to withhold a bonus from a current or departing employee – even where the terms of that bonus are not part of an employment agreement – can result in double or even treble damages.
This case is particularly important to companies who have employees whose compensation includes more than a fixed hourly rate or salary amount. For example, companies frequently have employment contracts with senior executives, sales team members, department heads, or others where compensation is partially based on performance of the individual, a department, or the company as a whole.
While this recent case helps clarify that bonuses related to an employee’s personal production can be governed by the Wage Act, questions linger regarding bonuses related to performance of units supervised by an employee. This could range from a manager’s bonus based on his department’s cost-saving goals, to a CEO’s compensation related to her company’s overall performance. Based on the lack of Rhode Island law in this area, it is likely that caselaw from other jurisdictions would help inform the decision of the Rhode Island courts should this matter come before them again. In the meantime, for more information on this evolving topic, please contact PLDO Partner Joel K. Goloskie at [email protected] or Paige E. Macnie at [email protected].
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