Court Backs Employers on Unpaid Bonuses

A state court rules that employers who are sued over some unpaid bonuses are not subject to stiff penalties associated with wages.

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You may not win any boss of the year awards, but a new ruling suggests the law may be on your side if you don't pay what an employee considers to be a promised bonus.

Connecticut's Supreme Court this month put an end to a decade-long dispute between two lawyers over a $50,000 year-end bonus. The court ruled that a "discretionary" bonus – one whose amount is indefinite or "not ascertainable by applying a formula" – does not meet the definition of "wage" and therefore not paying it does not make the employer liable to the stiff criminal and civil penalties mandated by Connecticut's Wage Act.

Why care about a couple of lawyers fighting over money? The decision is "very significant" for small businesses, says lawyer William Gallagher of New Haven, Connecticut, who represented the winning side. If you offer bonuses, you may want to have a look at how you structure them.

"Basically, [the decision] says even if a bonus is part of an arrangement [between employer and employee], so long as it remains discretionary, it's not statutory," Gallagher told Connecticut's The Day newspaper.  "It's one thing to be required to pay a bonus, but to have it classified as wages and subject to doubling of the amount and attorney's fees is punitive in nature." (The wage act calls for the employer – if found in violation – to pay double damages and the employee's legal bills. The employer can also face a fine of up to $5,000 and up to five years in prison, or both.)

The case – Ziotas v. The Reardon Law Firm -- grew out of a 12-year-old victory for two personal injury lawyers then at the same Connecticut law firm: founder Robert I. Reardon Jr. and associate Angelo Ziotas. The pair squabbled over who should get the glory, and finally Ziotas left, with Reardon refusing to pay the associate's $50,000 year-end bonus. (For the record, Reardon claimed Ziotas was "discharged for poor work performance.") Ziotas sued under breach of contract, and after several legal turns and appeals, the case landed in the state Supreme Court. Ziotas told The Day the decision could "really harm" employees in future cases.

"People are being paid under all kinds of structures," he said. "It will be hard for anyone who is not an hourly employee to keep an employer from wrongfully withholding wages."

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.