Medical Leave Reduces Bonus

A federal appeals court has ruled a company acted properly in reducing an employee's bonus following a two-month medical leave. However, the court says companies must make such payment distinctions based on specific plan criteria.

Company bonuses pegged to production or working a certain number of hours can be reduced if the employee goes on leave, a federal appeals court in Philadelphia has ruled.

Legal experts said the ruling was a warning to employers to review their company's policies on bonus programs to distinguish between performance- and non-performance based bonuses so employees understand the implications of taking a leave of absence under the Family Medical and Leave Act.

In a "client alert," the national law firm Proskauer Rose advises companies to be consistent in their bonus programs. If employers prorate productivity-based bonus programs under FMLA, the companies should prorate bonuses for "at least some other, non-FMLA forms of leave that negatively impact production," the alert states.

Deciding a question they called "one of first impression" among the nation's U.S. Circuit Courts of Appeals, a three-judge panel of the 3rd Circuit on Aug. 24 rejected an appeal by Robert Sommer, a former financial administrator for The Vanguard Group Inc., whose annual bonus payment for 2001 was reduced by a total of $1,788 after he took two months' medical leave for treatment of "major depression and generalized anxiety."

Although the federal Family and Medical Leave Act has been in effect since 1993, writes U.S. Circuit Judge Ruggero J. Aldisert, the law and its regulations did not address the prorating of company bonuses for employees who take time off under the FMLA and "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."

Nevertheless, Aldisert writes, the U.S. Department of Labor issued legal "opinion letters" on the FMLA in 1994 and 2000 that appear to differentiate between company bonuses based on production and those based solely on an "absence of occurrence," such as on-the-job safety.

"This rule is an appropriate application," Aldisert writes, "of the [FMLA] admonition ... that, while on FMLA leave, an employee is not entitled to the actual accrual of any right of employment but is entitled to those rights of employment 'to which the employee would have been entitled had the employee not taken the leave.' "

From a legal standpoint, says Paul R. Dorf, managing director of Compensation Resources Inc., a consulting firm in Upper Saddle River, N.J., the 3rd Circuit decision does not break new ground as it affirms the two previous Labor Department opinion letters.

But Dorf said the opinion is a "wake-up call" for company's to review their bonus plans for clarity of writing.

"I think a lot of these plans are ambiguous, poorly worded and have poor documentation," Dorf says. "These plans need to be clearly defined and [companies] need to make sure they are understandable by everybody."

In the case in Sommer vs. The Vanguard Group Inc., the 3rd Circuit noted that the bonus plan under which Sommer worked was created in 1984 to "recognize crew members' contributions to Vanguard's growth and success in a tangible way."

Qualification for the bonus, Aldisert writes, was based on employment on the last day of the calendar year, on the date of the plan's distribution and all days in between. The amount of the bonus, he continues, was based on the Vanguard employee's job level, length of service to the company and hours worked. The Vanguard bonus policy set a target of 1,950 hours worked as a threshold for the full bonus.

Although Malvern, Pa-based Vanguard's language for the bonus plan covering Sommer is murky, Aldisert writes, the plan was "more akin to a bonus program that rewards employee production. Production bonuses are those types of bonus programs that 'require some positive effort on the employee's part at the workplace,' as distinguished from a bonus that merely rewards an employee for 'compliance with rules.'

On Sept. 6, Sommer's attorney, William B. Hildebrand, of Cherry Hill, N.J., filed a petition asking the full 3rd Circuit to review the ruling by the three-judge panel. The 3rd Circuit, which hears appeals from federal trial courts in Pennsylvania, Delaware, New Jersey and the U.S. Virgin Islands, has not yet issued a ruling on that petition.