From Venulex.com
A federal appeals court has ruled that an employer may prorate an hours worked-based "production bonus" for employees who are absent from work while on leave under the Family and Medical Leave Act. In Sommer v. Vanguard Group, No. 05-4034 (3d Cir. August 24, 2006), the United States Court of Appeals for the Third Circuit, which has appellate jurisdiction over federal cases arising in Pennsylvania, New Jersey, Delaware and the Virgin Islands, held that the employer did not violate the FMLA when it reduced a former employee's annual bonus payment based on the employee's eight-week leave under the FMLA. This decision represents the first where a federal appellate court has considered the legality of proration of bonus programs under the FMLA. Accordingly, this decision provides valuable guidance for employers in structuring bonus programs to permit reductions based on employee leaves of absence.
The Department of Labor has issued guidance interpreting the FMLA to contemplate two varieties of bonus programs: an "absence of occurrence bonus" (e.g., a bonus for perfect attendance) and a "production bonus" (e.g., a bonus based on hours worked, the number of items manufactured, or some other measure of productivity). Generally, a "production bonus" requires some positive effort on the employee's part at the workplace, while an "absence of occurrence bonus" merely rewards an employee for "compliance with the rules." Based on the Department of Labor guidances, the court of appeals concluded that while an employer may not reduce an "absence of occurrence bonus" if the employee would have been otherwise qualified for the bonus had it not been for the taking of FMLA leave, an employer may prorate a "production bonus" by the amount of any lost production – be it hours or other quantifiable measure of productivity – caused by the FMLA leave. Therefore, because the characterization of an employee incentive as a "production bonus" or an "absence of occurrence bonus" can have a determinative effect on an employer's right to prorate a bonus based on an employee's absence, employers should be conscious of this critical distinction when formulating a written bonus program. To the extent an employer has an unwritten bonus program, the Sommer decision underscores the importance in reducing such program to writing in order to maximize the likelihood that it will be interpreted consistent with the employer's intent.
Because it is "often difficult to sift through the jargon-laden terms of a company's bonus program documents to ascertain the goal actually being rewarded," it is also crucial that a bonus program establish clearly the goal that it intends to reward in order to maximize the likelihood that it will be interpreted consistent with the employer's intent. In Sommer, the court found that the bonus program at issue was more akin to a "production bonus" because its goal was to provide incentive to employees to contribute to the employer's performance and production by meeting a predetermined hours goal.
In drafting a bonus program, employers also should clearly define the categories of leave that will result in a production bonus being prorated. In Sommer, the employer's production bonus rewarded employees for meeting an annual goal for hours worked. The bonus program defined "hours worked" as the actual hours for which an employee is paid or entitled to be paid by the employer for the performance of duties or for vacation, holidays or sick time. However, the policy explicitly excluded from the definition of "hours worked" leaves of absence under the employer's short- or long-term disability programs. Similarly, the employer had a practice of prorating the bonus based on absences due to workers compensation and personal leave.
The court of appeals held that the employer acted properly in prorating the production bonus based on an employee's unpaid FMLA leave, while crediting other employees who had taken paid vacation, holidays or sick leave with "hours worked," because the employer also prorated a variety of non-FMLA leaves of absence. The court observed that the FMLA regulations do not require the equal treatment of those who take unpaid forms of FMLA leave and those who take paid leave. Doing so, the court observed, would be incompatible with the FMLA regulations because it would entitle employees to accrue rights or benefits that would not otherwise have been available to them had the leave not been designated as FMLA leave.
Now that a federal appeals court has provided significant clarification on the issue of an employer's ability to prorate bonuses under the FMLA, employers are encouraged to review any existing written bonus programs to maximize the likelihood that any bonus be considered a "production bonus." On this point, it is important to note that the plaintiff in Sommer attempted to bring this claim as a class-action, alleging that the employer's proration policy interfered with the FMLA rights held by all similarly situated employees. Because an employer's bonus program has the propensity to affect groups of employees, disputes relative to the employer's decision to prorate employee bonuses because of FMLA leave are well-suited for class action litigation.[1] Therefore, the importance of carefully preparing and reviewing written bonus programs to maximize an employer's right to lawfully prorate employee bonuses under the FMLA cannot be overstated.
Jackson Lewis attorneys Donna Geary and Craig Snethen assisted in the preparation of this article.
Copyright © Jackson Lewis. VenuLex resources are intended for informational purposes only and should not be construed as legal advice.
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