Employment Agreements and Bonus Incentives

Employment Agreements in Texas

We previously covered general considerations of employment agreements in Texas. Today, we give extra considerations to disputes that may arise from such agreements, or the lack thereof, with a focus on bonus pay incentives.

Wages paid on commission and bonuses are typically subject to the terms of either an agreement between the employee and employer or a relevant collective bargaining agreement. Clarity in these agreements is crucial, particularly concerning how and when commissions and bonuses are earned, paid, and what happens upon the termination of employment​​.

Discretionary vs. Nondiscretionary Bonus Plans

The enforceability of a bonus promise largely depends on whether it is discretionary or nondiscretionary. A nondiscretionary bonus, if promised in exchange for additional efforts beyond the normal job scope, can constitute a valid contract. In contrast, a purely discretionary bonus may not create an enforceable contract if it's simply for services already contracted for. Texas law recognizes that an employer's promise to pay a bonus for extra effort can create an enforceable contract​​.

Post-Termination Bonuses and Commissions

One common scenario where a dispute may arise between an employer and employee is when the employee is terminated prior to being paid a compensation that they feel they have earned. The right to post-termination compensation hinges on the specific terms of the employment agreement and the circumstances of each case. For example, if an employee is terminated for cause, they might still be entitled to compensation depending on when it was “earned”. See Jourdan v. Schenker Int’l, Inc., 71 Fed. Appx. 308, 312 (5th Cir. 2003), where an employee had a valid employment contract that provided quarterly commissions and was terminated for cause. That court concluded that because the contract was silent as to the effect of job termination, a jury should consider the plaintiff’s right to post-termination bonus payments, even if the termination was for cause.

In the case where an employee is terminated without cause, and even if the employment agreement is “at will”, courts may still insert a good cause requirement. There is a line of Texas cases where the employees were at-will and had to still be employed with the company up until a certain date to qualify for the bonus. See Enstar Corp. v. Bass, 737 S.W.2d 890 (Tex. App.–El Paso 1987, no writ); Miller v. Riata Cadillac Company, 517 S.W.2d 773 (Tex. 1974); Handy Andy, Inc. v. Rademacher, 666 S.W.2d 300 (Tex. App.–San Antonio 1984, no writ). In each of these cases, the employees were terminated without cause and prior to the certain date they would be entitled to bonuses under their prospective incentive plans. Under the plain terms of the agreement, none of them should have been entitled to a bonus but each were entitled to a pro rata share of the bonus they had earned up until the time of termination. These courts seemed to adopt the logic of 5th Circuit case from 1949, Coleman v. Graybar Electric Co., 195 F.2d 374 (5th Cir. 1952), which discussed that “a construction of the language which would permit the employer to terminate the continuity of service without any cause and as a matter of arbitrary choice, or because of a desire to evade the payment of additional compensation would be entirely inconsistent with the purpose of the plan and, in the absence of clear and compelling language, should not be adopted.”

On the other hand, Texas courts and the 5th circuit have ruled against employees who had at will employment agreements, who were terminated without cause, but the terms for bonus compensation clearly set out a trigger event that called for something more than merely being employed on a certain date. See Mitsubishi Aircraft Int’l, Inc. v. Maurer, 675 S.W.2d 286 (Tex. App.–Dallas 1984, no writ); Caton v. Leach, 896 F.2d 939 (5th Cir. 1990).

Final Thoughts

It cannot be stressed enough, especially when dealing in contracts, that the facts and the express terms matter. For employers offering bonus incentives, the more detailed and unambiguous the terms are, the better you can avoid unintended consequences in situations where you thought the agreement was ironclad. On the flip side, employees may still be entitled to a bonus, depending on the facts and complete context of the situation. This is why it is important to contact an attorney competent in such matters to help you navigate what can easily become a complex legal situation even if it appears simple.

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