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IS AN EMPLOYER REQUIRED TO PAY A BONUS AFTER AN EMPLOYEE IS TERMINATED?

What compensation is rightfully earned and owed to an employee after employment ends is a serious question for both the company and the former employee. This issue is a common problem when a promise to pay a bonus is involved. The question then becomes;
Does an employee have a right to a bonus that is promised or earned before the employee is terminated, but was not actually paid out prior to termination.

In a recent case decided by the 5th Circuit on October 18, 2018, Sellers v. Mineral Technologies, Inc., CETCO Energy Services Company, L.L.C., Civ. A. No. 17-20555, 2018 WL 6266528 (5th Cir. Oct. 18, 2018), the Court reviewed a decision by the Southern District of Texas denying a terminated employee a bonus payment after he was terminated. The Southern District found that because the employment agreement at issue required the employee to be employed on a certain date in order to receive the bonus, and he was not because he had been terminated, there was no breach of contract and the bonus payment was rightfully denied. Sellers appealed this determination.

The 5th Circuit Court reversed the Southern District finding that (1) a required thirty day notice of termination stated in the employment agreement rendered Sellers still technically employed on the date necessary to receive his bonus payment and (2) even if the condition of employment on the certain date was not “technically met” “..if one party prevents another from performing a condition precedent or renders its fulfillment impossible, then the condition may be considered fulfilled.”

To provide some background into the Sellers case, Sellers was a Vice President of Business Development – Produced Water Equipment. He had an employment agreement that stated he would receive a potential bonus as part of his compensation (specifically 5% of the net margin of sales made under his supervision). When the company was bought by another company, Sellers was terminated without cause. Sellers sued, in part, for breach of contract stating that his former employer breached his employment agreement and owed him a $428,681.71 bonus payment.

The district court decided that Sellers was not entitled to the bonus payment because his employment agreement stated that he had to be still employed on a certain date in order to receive it. Since he was terminated before that, the district court found there was no breach.

On appeal, the 5th Circuit reversed the district court’s decision because the employment agreement also stated that if an employee was terminated without cause, he/she had to be provided thirty (30) days advance notice. Therefore, the 5th Circuit concluded that the effective date of Sellers’ termination was really thirty days after he was originally notified. This close reading of the employment agreement language was the turning point for the appellate decision. Because of the additional thirty (30) days’ notice, Sellers was in fact “employed” during the time necessary to qualify for his bonus. On appeal, the 5th Circuit Court concluded that even though Sellers was not technically employed on the date required to receive the bonus, it was appropriate to find that condition was fulfilled under the circumstances: that Sellers was terminated without cause and the company’s actions (through no fault of his own) prevented him from performing or made it impossible for him to fulfill the “condition precedent” (being employed on a certain date).

Overall, this case makes an important point about the careful reading and analysis of employment agreements when attempting to determine whether a bonus payment is owed after termination.