Over the past couple of months I have been dealing with a case against a major national bank on behalf of one of its former employees.  The case involves his "discretionary" annual bonus, which most employers would say is just that-discretionary.  However, the term discretionary is misleading because except in some very limited circumstances a party to a contract does not have absolute discretion.

This is because all contracts in California have an "implied covenant of good faith and fair dealing".  This is one of the least sexy concepts in contract or employment law, so I will summarize it quickly.  This doctrine acts as a check on parties in contracts where one side has the right to exercise broad discretion that effects the other party's rights.  The law says that in such a case when the party exercises their discretion it generally must be done "fairly".

This is especially important in our case because on Wall Street investment bankers and other professionals are usually paid a (relatively) small salary and then an extremely large annual bonus at the end of the year.  In our case, the employee was used to making over $750,000 and suddenly his employer decided at the end of last year to give him a bonus of less than $50,000 for 2007 with no warning whatsoever and despite the fact that he was performing better than his peers.

It turns out that the employer was planning to lay him off in a few weeks, so they decided to give his usual bonus to his co-workers.  This is the classic case where the implied covenant comes up in California employment law cases.  If an employee performs acceptable work during the year with the expectation that he would receive a bonus similar to his peers and what he received in prior years, the employer does not exercise discretion in "good faith" by paying him hundreds of thousands of dollars less than they do to similar employees.

This might be an extreme case for most employees, but the same concepts can be applied to any bonus and even Christmas bonuses in certain circumstances.

Employers, either through ignorance or intentionally, often make big mistakes in calculating overtime rates of pay for their employees and these often turn into big claims by the employees for unpaid wages later on.

Overtime Rate NOT Just 1.5 Times Hourly Rate

To calculate an employee's "overtime rate" of pay, you first have to calculate their "regular rate" of pay, which is the number multiplied by 1.5 to get an "overtime rate".

Most employers do not include commissions, bonuses and other additional money an employer earns in calculating the employee's "regular rate" for overtime purposes.  Employers usually just take the employee's hourly rate, multiply it by 1.5 and use that as the overtime rate.

However, under California law the "regular rate" is generally calculated by taking all of an employee's regular wages (hourly pay, salary, bonuses, commissions, etc.) earned in a given week and dividing it by 40.  The overtime rate is then multiplied by 1.5.

This can make a very big difference in how much money an employee gets paid in overtime.

An Example

Assume a salesperson makes $24 per hour as a "base", makes an additional $1,000 per week in commissions and works 20 hours of overtime each week.

This person's employer most likely calculates his overtime pay by taking his hourly rate ($24) and multiplying it by 1.5 to arrive at an overtime rate of $36 per hour.  This equals $720 of overtime pay each week, or $37,440 per year.

What the employer should do is take the regular hourly pay for the week ($24 X 40 hours=$960) and add it to the commissions earned ($1,000) to arrive at the total weekly pay ($1,960).  This number should then be divided by 40 to arrive at a "regular rate" of $49.  This is multiplied by 1.5 for an overtime rate of $73.50 per hour.  This means the employee should be receiving $1,470 of overtime pay each week, or $76,440 per year.

So, each year this employer is getting away with paying the employee $39,000 less than he is legally entitled to!  Employees in California are entitled to recover up to four years of unpaid wages, which in this case equals roughly  $156,000.

Assuming there are ten such salespeople working for a company, this quickly adds up to over $1.5 Million over four years.

Q: My employer terminated me today (December 31, 2006). I was supposed to receive a $10,000 performance bonus for 2006, but one of the terms of my bonus agreement says that I have to be employed on January 1, 2007 to get my bonus. The company is not doing very well and I think I was actually terminated so that they did not have to pay me the bonus. Can they get away with this?

--Unhappy New Year (CA)

A: I am sorry that this happened to you. Unfortunately, this is more common than most people think, but usually it is not so blatant. Often when managers start looking at their budgets at the end of the year and want to "trim the fat", they do this sort of thing to quickly save some cash at the expense of their employees.

You promised your employer you (1) would perform at a certain level during 2006 and (2) be employed on January 1, 2007. They in turn promised to give you a year-end bonus if you kept your promises to them.

In your situation, the only reason that you did not satisfy all of the conditions your employer placed on your bonus is because they essentially canceled the deal before you could finish.

This situation is similar to a common law school hypothetical. Say one person promises another person to give them $10,000 if they walk across a bridge. At the very last second before the person crossing the bridge reaches the other side, the other person yells out that he is canceling the offer.

California courts often look at situations like yours and determine what is "fair". It is likely that a court would decide that you complied with your bonus contract and it was only your employer's act of canceling your contract that kept you from finishing performance.

If so, you would be awarded your bonus as well as attorney's fees, costs, interest and possible penalties.