TERMINATED INVESTMENT BANKERS AND FINANCIAL SERVICES EMPLOYEES MAY BE ENTITLED TO RECOVER THEIR UNPAID BONUSES, DESPITE EMPLOYMENT-RELATED DOCUMENTS WHICH RENDER SUCH BONUSES “DISCRETIONARY” OR WHICH RESTRICT BONUSES TO ACTIVE EMPLOYEES

* David S. Rich < drich@davidrichlaw.com > is the founding member of the Law Offices of David S. Rich, LLC in New York City and Englewood Cliffs, New Jersey. Mr. Rich litigates commercial, employment, and securities matters in federal and state courts, and arbitrates such matters before FINRA and other arbitral bodies.

I. Introduction

In an October 2008 article,[1] this author explained that, under New York law, a terminated employee may pursue, among other claims, causes of action for breach of express and implied contract, quantum meruit, and violation of Article 6 of the New York Labor Law[2] against his or her employer for failing to compensate the employee for bonuses owed to him or her, even where no agreement to pay bonuses is set forth in writing. As that article noted, such unpaid bonuses may be particularly large for highly paid professionals on Wall Street, who customarily are paid a significant percentage of their annual compensation after the end of the year in which the professionals’ investment banking services or other financial services were rendered.[3] Since the publication of that article six months ago, New York City’s financial services sector has eliminated thousands more jobs.[4] Two months ago, Robert C. Lieber, New York City’s deputy mayor for economic development, predicted that the City’s financial services sector will shed 65,000 jobs as a result of the financial crisis.[5]

Given this grim economic outlook, discharged workers should know they may be entitled to full or pro rata bonuses for a prior year or years’ employment, even where the written employment contract, the employee handbook, the written bonus plan, or other employment-related documents contain language purporting to afford the employer “discretion” in determining bonuses. Many arbitral awards and court decisions have interpreted written terms giving the employer “discretion” or the like in deciding upon bonuses as meaning only that the employer has the limited discretion to decide the reasonable amount of such bonus. Employees should also be aware that their unpaid bonuses are not barred by employment-related documents purporting to require that a worker be employed by the firm at year-end or when bonuses are ultimately distributed in order to be entitled to such a bonus.

II. Express and Implied Contract Claims, and Employers’ Defenses To Such Claims

A. “Discretion”-Granting Language

As this author has previously discussed at greater length,[6] "Employees in this State [of New York] may enforce an [oral] agreement to pay an annual bonus made at the onset of the employment relationship where such bonus constitutes 'an integral part of plaintiff’s compensation package.'"[7] Apart from oral contracts, New York state courts, and federal courts applying New York law, have determined, in numerous lawsuits by professionals in the financial industry or in other fields, that "The course of dealing between the parties evinces an implied promise that annual or semi-annual bonus payments constitute a part of plaintiff’s compensation."[8]

In court actions or arbitration proceedings in which workers claim breaches of express and implied contracts to pay bonuses, employers often defend on the ground that the written contract of employment, the employment manual, the written bonus plan, or other employment-related documents contain language purporting to afford the employer “discretion,” “sole and exclusive discretion,” or the like in determining bonuses.[9] Particularly in arbitration proceedings before the Financial Industry Regulatory Authority, Inc. (“FINRA”), this defense by employers has met with only limited success. Arbitral awards and judicial decisions recurrently have interpreted written terms giving the employer “discretion” or the like in deciding upon bonuses as meaning only that the employer has the limited discretion to determine the reasonable amount of such bonus.

FINRA arbitration panels decide the vast majority of Wall Street compensation disputes.[10] FINRA, NASD, and NYSE arbitration panels predominantly have found that terminated employees are entitled to full or pro rata bonuses for a prior year or years’ employment, despite employers’ arguments that the terms of employment-related documents render such bonuses utterly discretionary.[11]

The reasons for many FINRA arbitration panels’ “view that, in the financial services industry, bonuses are an integral, nondiscretionary part of compensation”[12] are perhaps best expressed by the England and Wales Court of Appeal (Civil Division) in Commerzbank AG v. Keen.[13] In Keen, the defendant bank terminated the plaintiff individual, the manager of the defendant bank’s investment banking division’s proprietary trading desk, in June 2005, and awarded the manager no bonus for 2005.[14] The bank’s offer letter to the manager stated, "'You are eligible to participate in the [Bank’s] discretionary bonus scheme. The decision whether or not to award a bonus, the amount of any award and the timing and form of the award are at the discretion of the [Bank].'"[15] The England and Wales Court of Appeal held that “it was an implied term of [the management’s] employment contract that the Bank would not exercise any discretion it had in relation to his bonus award irrationally or perversely.”[16] The Keen Court explained:

The employment relationship contains implied duties which do not normally feature in commercial contracts sued on by business men in the Commercial Court . . . . Employment is a personal relationship. Its dynamics differ significantly from those of business deals . . . . In general there is an implied mutual duty of trust and confidence between employer and employee. Thus it is the duty on the part of an employer to preserve the trust and confidence which an employee should have in him. This affects, or should affect, the way in which an employer normally treats his employee.

Consistent with this duty an employer ought to supply an employee with an explanation of the reasons for the exercise of discretion in respect of additional pay. Unless there is a good reason to the contrary the explanation ought to be given by the person(s) responsible for the decision affecting additional pay.[17]

While the Keen decision is of course not binding on New York State courts or on FINRA arbitrational panels, it is submitted that Keen may parallel many FINRA arbitration panels’ conviction that – despite “discretion”-affording language in the written employment agreement, the employment manual, or the written bonus plan – the dismissal of an investment banker cannot be used to escape paying a bonus.

Likewise, in many cases, the New York State courts have found that discharged employees are entitled to bonuses for a prior year or years’ employment, despite employers’ arguments that the terms of employment-related documents render such bonuses wholly discretionary. For example, in Rothman v. KPMG Peat Marwick, LLP,[18] the Supreme Court, New York County, held that triable issues of fact, precluding summary judgment for the defendant investment bank, existed as to whether the bank had discretion not to pay an investment banker, formerly employed by the bank, an annual bonus, even though the parties’ employment agreement provided that the bank had such discretion.[19] Specifically, the parties’ employment agreement stated: “You will be eligible for discretionary bonuses in accordance with [the employer's corporate finance group's] applicable policies and procedures regarding such bonuses. Please note that [the employer] has no obligation toward discretionary bonuses.”[20] In holding that such “discretion”-granting language was not dispositive of the plaintiff’s right to a bonus, the Rothman Court explained:

A reasonable inference can be drawn, from the contract language, that [the employer’s] discretion is not absolute, but rather limited by the terms of the contract with respect to

. . . eligible employees’ achievements of revenue goals and [the employer’s] ‘strategic objectives’ . . . . [W]hen read in context it might . . . be reasonable to infer, [from the employment agreement’s “discretion”-conferring language,] that once a bonus pool had been established for the year, [the employer] could only use its discretion to refuse a bonus based on plaintiff's failure of achievement within the established guidelines.[21]

B. Plan Language Requiring That An Employee Work Until Year-End or Until The Bonus Was To Have Been Paid

This author elsewhere has explained[22] that, on Wall Street, when an employee resigns or is terminated before the end of the employer’s fiscal or calendar year, or before the time bonuses are actually paid (which may be as late as four months into the following year),[23] employers frequently refuse to pay a bonus. Workers maintain that the bonus was their right under a contract of employment. Employers frequently argue, among other points, that the written employment contract, the employee handbook, the written bonus plan, or other employment-related documents require that a worker be employed by the firm at year-end or when bonuses are ultimately distributed in order to be entitled to such a bonus.

However, New York State appellate and trial courts and FINRA and NASD arbitration panels have determined, in many lawsuits or arbitration proceedings by professionals in the financial industry or in other fields, that the fact "[t]hat the amount of each annual bonus was determined at the end of the year does not bar recovery under an implied contract."[24] "Nor can a bonus be withheld because . . . the employee did not work until the date the bonus was to have been paid," even if employment-related documents purport to impose such a requirement. [25]

While research reveals no federal or state court decisions addressing deciding the issue, it is submitted that, in some instances, there is another reason why employment-related documents may not lawfully restrict bonuses to workers who remain in the firm’s employ at the time bonuses are actually paid. This additional reason has much to do with the current recession. Specifically, investment banks and other large employers[26] in the financial services industry may carry out “mass layoffs”[27] of employees without giving those employees the 60 days of advance notice[28] required by the federal Worker Adjustment and Retraining Notification Act of 1988, as amended (the “WARN Act”),[29] or the 90 days of advance notice[30] required by the New York State Worker Adjustment and Retraining Act (the “NY WARN Act”).[31] Such failures to comply with the notice provisions of the WARN and NY WARN Acts may render employers liable to affected employees for back wages, lost benefits, civil fines, and attorneys’ fees.[32] Further, it is submitted that, if an employer fires a worker without giving him or her the requisite WARN Act or NY WARN Act advance notice, and, during the 60 days or 90 days after the termination, as applicable, the employer distributes annual bonuses, then that worker is entitled to his or her unpaid bonus, despite employment-related documents which by their terms require a worker to be employed when bonuses are ultimately distributed in order to be entitled to the same. This is the case because “the WARN remedy of back pay mirrors the type of remedy afforded those who fall victim to an implied contract breach – giving individuals what they would have been entitled to had there been no breach.”[33]

In other words, where a large firm terminates workers en masse without giving those workers the two months notice or three months of advance notice which the federal and New York WARN Acts respectively require, those workers are entitled to the compensation they would have received but for the employer’s statutory violation.[34] It is submitted that this compensation includes bonuses, distributed in the 60 days or 90 days after the mass layoff, for the fiscal or calendar year in which the mass layoff occurred, even if employment-related documents state that a worker must be employed when bonuses are actually paid in order to be entitled to such a bonus.

III. Conclusion

In sum, in New York, a discharged employee may possess a cause of action for breach of express or implied contract entitling him or her to full or pro rata bonuses for a prior year or years’ employment, even where the written employment agreement, the employment manual, the written bonus plan, or other employment-related documents include language purporting to grant the employer “discretion” in determining bonuses. Arbitration panels and courts frequently have construed written terms giving the employer “discretion” or the like in deciding upon bonuses as meaning only that the employer has the cabined discretion to decide the reasonable amount of such bonus. Moreover, employees’ unpaid bonuses are not prohibited by employment-related documents which by their terms require that a worker be employed by the firm at year-end or when bonuses are ultimately distributed in order to be entitled to such a bonus. Terminated individuals in the investment banking or financial services industries, who have an idea that their former employers are unlawfully refusing to compensate them for monies owed to them, should discuss their options with knowledgeable counsel.

[1] See David S. Rich & Barry R. Lax, Terminated Employees in the Investment Banking and Financial Services Industries May Be Entitled to Recover Their Unpaid Bonuses, Int’l Academy of Fin. Mgmt. Global Online J., Oct. 31, 2008, http://www.aafm.us/iafm-article.php?id=487&cat=23.

[2] N.Y. Labor Law §§ 190-199-a.

[3] Rich & Lax, supra note 1.

[4] For example, in November 2008 alone, New York City’s financial sector eliminated 2,400 jobs. Patrick McGeehan, Job Losses in the City Cut Across Many Areas, N.Y. Times, Dec. 19, 2008, at __.

[5] Patrick McGeehan, After Reversal of Fortunes, City Takes a New Look at Wall Street, N.Y. Times, Feb. 23, 2009, at __.

[6] Rich & Lax, supra note 1.

[7] Mirchel v. RJM Securities Corp., 205 A.D.2d 388, 389, 613 N.Y.S.2d 876, 878 (1st Dep’t 1994) (quoting Harden v. Warner Amex Cable Communications Inc., 642 F. Supp. 1080, 1096 (S.D.N.Y. 1986)); Rich & Lax, supra note 1.

[8] Mirchel, 205 A.D.2d at 390, 613 N.Y.S.2d at 879.

[9] See Allan S. Bloom & Richard B. Palmer Jr., Neither Rain, Nor Snow, Nor Sleet, Nor Bonus, N.Y. L.J., Jan. 4, 2006, at 4 (“One suggestion for employers wishing to minimize their exposure to bad faith claims is to include language in offer letters or policies clearly delineating that bonuses, ‘if any,’ will be paid at the absolute discretion of management”); Robert P. Haney, Jr. & Cynthia Soohoo, Why Employees Win Bonus Claims: Pay Plans Can Create Contract Rights, N.Y. L.J., Sept. 21, 1998, at S4 (“Even if an employee establishes a written bonus right or policy, the employer may prevail if the bonus provision unambiguously gives the employer absolute discretion over the granting or payment of bonuses.”).

[10] FINRA regulates nearly 5,000 brokerage firms doing business in the United States. Finra.org, About the Financial Industry Regulatory Authority, http://www.finra.org/AboutFINRA/index.htm (last visited March 28, 2009). FINRA was created in July 2007 through the consolidation of the National Association of Securities Dealers (the “NASD”) and the member regulation, enforcement and arbitration functions of the New York Stock Exchange (the “NYSE”). About the Financial Industry Regulatory Authority, supra note 10.

Any individual registered under the Rules of FINRA is both a "'person associated with a member'" and an "'associated person'" within the meaning of Rule 13100(a) and 13100(r) of the FINRA Code of Arbitration Procedure for Industry Disputes (the “FINRA Industry Code”). Broker-dealer firms generally are members of FINRA. See FINRA Indus. Code R. 13100(o). A compensation dispute between an associated person (the individual) and a FINRA member (the broker-dealer firm) “arises out of the business activities of . . . [the FINRA] member.” FINRA Indus. Code R. 13200. As a result, Rule 13200(a) of the FINRA Industry Code requires the FINRA member (the broker-dealer) to arbitrate the compensation dispute with the associated person (the individual).

[11] See, e.g., Schwartz v. Warburg Dillon Read LLC f/k/a UBS Securities, LLC, FINRA Arbitration No. 1998-007500 (June 19, 2000) (awarding, to former employee, $2,000,000 for breach of employment contract and in quantum meruit; the panel considered, among other things, “industry custom and practice concerning compensation and the payment of so-called discretionary bonuses and the inherent obligation of fair dealing and good faith implicit in all such arrangements”); Katz v. Deutsche Bank Securities, Inc., NASD Arbitration No. 98-04995 (June 15, 2000) (holding that the respondent brokerage firm, after firing the claimant employee in September 1998, breached its express and implied contracts with the employee by failing to pay the employee a bonus for 1998; awarding, to the employee, $72,500 for a 1998 bonus, and rejecting the brokerage firm’s arguments “that Claimant failed to prove the existence of a contractual obligation on the part of [the bank] to award him . . . a bonus for 1998,” that “[the firm’s] . . . bonus program” was merely “discretionary,” and that “[the employee] did not have a contract guaranteeing him a bonus”).

[12] Pearl Zuchlewski, Bonus Claims in New York, 2008 Annual Meeting of Public Investors Arbitration Bar Ass’n 400, 402 (on file with author).

[13] [2006] EWCA (Civ) 1536 (Eng.).

[14] Commerzbank AG v. Keen, [2006] EWCA (Civ) 1536, [5], [10] (Eng.).

[15] Keen, [2006] EWCA (Civ) 1536, [7].

[16] [2006] EWCA (Civ) 1536, [12].

[17] [2006] EWCA (Civ) 1536, [43]; see also Sathe v. Bank of New York, No. 89 Civ. 6810, 1990 WL 58862, at *1-*4 (S.D.N.Y. May 2, 1990) (the defendant bank’s predecessor institution’s written bonus plan “g[ave] the [predecessor’s] Chairman discretionary power to do anything he deems appropriate for any reason as to the payment of a bonus”; nonetheless, the Court denied the bank’s motion to dismiss, for failure to state a claim, the predecessor’s former senior vice president’s cause of action for breach of the bonus plan, because the former senior vice president “claims that the contract was breached when someone other than the Chairman of [the predecessor institution] made the final determinations as to bonus payments”).

[18] No. 601756/98 (N.Y. Sup. Ct. N.Y. County Mar. 4, 1999).

[19] Rothman, No. 601756/98, slip op. at 1-3.

[20] Rothman, No. 601756/98, slip op. at 1.

[21] Rothman, No. 601756/98, slip op. at 1; see also Mirchel, 205 A.D.2d at 388-390, 613 N.Y.S.2d at 877-878 (government securities broker’s complaint sought an unpaid, yearly bonus; reversing the Supreme Court’s order, which had granted summary judgment dismissing the broker’s complaint, despite the “assertion of defendant’s president that the company’s policy made payment of a bonus both discretionary and contingent upon continued satisfactory employment”); Halikias v. Warburg Dillon Read LLC, 195 Misc.2d 447, 447-450, 759 N.Y.S.2d 288, 289-291 (Sup. Ct. N.Y. County 2000) (confirming, and denying broker-dealer’s cross-motion to vacate, arbitration award to the petitioner individual -- who "had held various high-level positions with" the broker-dealer -- of $1,442,406 in additional bonus compensation for 1997-1998, despite “petitioner’s original compensation agreement and employment handbooks that all state that bonuses are wholly discretionary”), confirming and denying cross-motion to vacate NYSE Arbitration No. 1998-007299 (Dec. 10, 1999); Credit Suisse First Boston Corp. v. Crissanti, No. 114758/00 (N.Y. Sup. Ct. N.Y. County Jan. 19, 2001) (oral opinion) (denying employer’s petition to vacate arbitration award granting a terminated arbitrageur a $2,339,532 bonus; “even where there is an existing agreement that makes bonus compensation discretionary, there can be issues of fact as to whether or not based upon course of dealing in the industry, [or] based upon a pattern and course of conduct between the parties, [the terminated employee is entitled to recover his or her unpaid bonuses] . . . . [T]here are considerations beyond the mere agreement of the parties”), denying petition to vacate NYSE Arbitration No. 1999-007828 (June 16, 2000), aff’d, 289 A.D.2d 83, 734 N.Y.S.2d 150 (1st Dep’t 2001). But see Namad v. Solomon, 74 N.Y.2d 751, 752-753, 543 N.E.2d 722, 723-724, 545 N.Y.S.2d 79, 80-81 (N.Y. 1989) (affirming Appellate Division’s order granting employer’s motion for summary judgment dismissing former employee’s complaint seeking to recover more compensation in the form of bonuses than the employer paid to him; holding that the parties’ employment contract, which stated, “The amounts of other compensation and entitlements, if any, including regular bonuses, special bonuses and stock awards, shall be at the discretion of management . . . . Such bonuses as are awarded will be consistent with the customary policy of the company,” “vest[ed][] . . . [the employer] with complete discretion” regarding the amount of bonuses, and thus that the Appellate Division properly denied the admission of extrinsic evidence as to the company’s customary policy).

[22] Rich & Lax, supra note 1.

[23] David B. Wechsler & Leonard Pack, Do Terminated Employees Forfeit Their Right to a Bonus?, N.Y.L.J., Mar. 16, 1993, at 1.

[24] Mirchel, 205 A.D.2d at 390, 613 N.Y.S.2d at 879.

[25] Id. at 390, 613 N.Y.S.2d at 879; accord Guggenheimer v. Bernstein Litowitz Berger & Grossman LLP, 11 Misc.3d 926, 927-930, 932, 810 N.Y.S.2d 880, 882-884, 886 (N.Y. Sup. Ct. N.Y. County 2006) (denying motion of defendant law firm, which specialized in representing plaintiffs in class-action lawsuits, to dismiss, for failure to state a cause of action, former associate’s complaint seeking, under alleged oral agreement, bonus for bringing in two cases which, in the year or two after the associate left the firm, the law firm settled for $900,000 and $1,350,000; “Nor can a bonus be withheld because, as here, the employee did not work until the date the bonus was to have been paid”); Katz v. Adams Cohen Securities, Inc., NASD Arbitration No. 94-04892, slip op. at 3 (Jan. 18, 1996) (awarding $298,677, representing unpaid bonuses for the year 1993, to two investment bankers who resigned in November 1993 to start their own business; rejecting employer’s arguments that “Claimants had . . . [no] right to a bonus but, if they had such a right, they waived that right when they voluntarily resigned prior to the time that the 1993 bonuses were paid”); Howard S. Meyers, Recovering Unpaid Bonus Payments in Turbulent Times, N.Y. L.J., June 27, 2008, at 4 (“Arbitration panels have also found employees who have been terminated, are entitled to full or pro rata bonuses, rejecting claims by employers . . . that an employee must be employed by the firm at year-end or when bonuses are ultimately distributed in order to be entitled to receipt of what is, in reality, earned wages.”).

[26] To be subject to the requirements of the federal WARN Act, an employer must employ at least 100 full-time employees or 100 employees (regardless of full-time status) who work an aggregate of 4000 hours per week (exclusive of overtime). 29 U.S.C. § 2101(a)(1). To be subject to the requirements of the NY WARN Act, an employer must employ at least 50 full-time employees or 50 employees (regardless of full-time status) who work an aggregate of 2000 hours per week. N.Y. Labor Law § 860-a(3).

[27] A reduction in force (that is not a plant closing) is a “’mass layoff’” within the meaning of the federal WARN Act if it results in an employment loss at a single site of employment during any 30-day period for: (1) at least 33 percent of the full-time workforce and at least 50 total full-time employees; or (2) at least 500 full-time employees, regardless of the percentage of the workforce. 29 U.S.C. § 2101(a)(3). A reduction in force (that is not a plant closing) is a “’[m]ass layoff’” if it results in an employment loss at a single site of employment during any 30-day period for: (1) at least 33 percent of the full-time workforce and at least 25 total full-time employees; or at least 250 full-time employees, regardless of the percentage of the workforce. N.Y. Labor Law § 860-a(4).

[28] See 29 U.S.C. § 2102(a).

[29] 29 U.S.C. §§ 2101-2109.

[30] See N.Y. Labor Law § 860-b(1).

[31] N.Y. Labor Law §§ 860 – 860-i.

[32] See 29 U.S.C. § 2104; N.Y. Labor Law §§ 860-g, 860-h.

[33] Frymire v. Ampex Corp., 61 F.3d 757, 764 (10th Cir. 1996).

[34] Cf. N.Y. Labor Law § 860-g(1), 860-g(1)(b) (failure to comply with the notice provision of the NY WARN Act renders an employer liable to each affected employee for “[t]he value of the cost of any benefits to which the employee would have been entitled had his or her employment not been lost”).

ABOUT THE AUTHOR

* David S. Rich < drich@davidrichlaw.com > is the founding member of the Law Offices of David S. Rich, LLC in New York City and Englewood Cliffs, New Jersey. Mr. Rich litigates commercial, employment, and securities matters in federal and state courts, and arbitrates such matters before FINRA and other arbitral bodies.