Whether an employer must pay a promised bonus depends on a number of factors. Generally, for some purposes, bonuses may be characterized as discretionary or non-discretionary payments.
An employer pays a bonus to an employee outside of or in addition to their regular pay. The employee’s regular pay may be hourly, a salary, a commission, or piece rate pay.
One consequence is that a bonus that is discretionary does not count towards the calculation of an employee’s overtime pay and usually may not be owed to an employee if the employee separates from their employment for whatever reason, whether voluntarily or not, before the bonus is paid. A discretionary bonus is essentially an unenforceable promise.
Non-discretionary bonuses, on the other hand, count toward the calculation of overtime, which must be 1.5 times the employee’s base pay. An employer may be required to pay a non-discretionary bonus even if the employee has left their employment when it is paid.
Of course, if the employee is exempt from overtime, this distinction is less important. However, the enforceability of employee bonuses may still be significant for other reasons, as the employee may reasonably expect to receive it, even if they are not employed at the time it is paid. However, they may not have a right to a bonus in that situation.
Legally, to be discretionary, a bonus must have the following characteristics:
- The employer must control whether or not the bonus is paid.
- The employer must determine the amount of the bonus payment at the time it is paid.
- The amount must be determined and the bonus paid close to or at the end of the period for which the bonus is granted.
- The bonus is not addressed in an employment contract with the employee or some other form of employer promise that leads the employee to expect payment under certain circumstances.
If the employer does not have the control over the bonus suggested by these characteristics, then the bonus is most likely one that is non-discretionary.
Bonuses in the form of gifts for special occasions are discretionary and may be excluded from calculation of the regular rate of pay and thus from the calculation of overtime. Bonuses that are non-discretionary, i.e., promised in such a way that an employee expects the payment, must be included in the calculation of the employee’s earnings that are used to determine their regular rate of pay and, in turn, what their overtime pay rate should be.
A legal consultation in Texas would help an employer or an employee understand the law of employee bonuses and when an employer is obligated to pay them. It would help both parties to be familiar with the law at the time of employment contract negotiation.
Is an Employee Bonus Only Good for Future Work?
Bonuses may be promised for future performance or paid for past performance of the kind the employer wishes to reward. An employee is not entitled to a bonus that is truly discretionary. Again, whether it is discretionary or not depends mostly on the factors noted above.
In addition, if payment of the bonus is promised in an employment contract, it must be paid when the employee puts in the performance they promise in their contract. It is an issue that an employee and employer both would want to address during contract negotiation.
An employee is entitled to receive a pro-rata portion of non-discretionary bonus if their employment has been terminated for good cause. They would receive the portion that accrued to them while they were employed.
Or if the employer’s policy that provides for the payment of the bonus specifically states that the employee must be in the employ of the employer at the time the bonus is paid to receive it, then the employee must be employed at the time a bonus is paid to get it. If they are not, they could not expect to receive the bonus.
Can an Employer Take Away a Bonus in Texas?
An employer may take away a bonus in Texas unless the promise of a bonus is part of a contract of employment, and the employee has given the employer the performance promised by the employee in the contract.
If this is the case, then the payment of the bonus is part of a contract, and it has to be paid. If an employer were to want to end payment of the bonus, they would need to renegotiate the contract they have with the employee.
If an employer promises to pay a bonus to the employee in exchange for some performance on the part of the employee in connection with their employment, e.g., achieving a certain sales goal, then if the employee performs as promised in the contract, the employer must pay the bonus. Failure to pay the bonus would be a breach of contract.
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Can a Promised Employee Bonus Be Enforced Even if It Is Not Considered a Contract?
It is possible, in some cases, that a court would enforce an employer’s promise to pay a bonus even if a contract is not proven. A court might enforce a promise to pay a bonus on the legal theory of detrimental reliance.
It is important to note that courts reserve detrimental reliance only for cases in which there is a possibility of an injustice being done. Texas courts do recognize the theory of detrimental reliance, or “equitable estoppel” as it is sometimes called.
An individual who plans to rely on the theory of detrimental reliance would want to consult an experienced Texas lawyer to find out whether the facts of their case present the type of situation in which a Texas court would apply the theory.
The theory of detrimental reliance might be available to the employee who relies on the promise of their employer to pay a bonus and is affected detrimentally by that reliance, suffering a loss or injury when the bonus is not paid.
The employee would have to produce evidence that proves the following elements to succeed:
- A promise was made by an employer to the employee.
- The employee relied on the promise and took some action in reliance on it.
- The reliance by the employee was reasonable and foreseeable.
- The employee suffered a detriment by relying on the promise.
- Failure to enforce the promise would result in an injustice to the employee.
For example, suppose employer X promises employee Y a bonus for his past work and contributions to X’s business enterprise. Y plans to use the money to buy a new car as the car he now has is on its last legs. Y talks to X to confirm the bonus and explain his planned use of the funds.
Although Y is concerned, X reassures him that the bonus will be paid, so Y moves forward with his purchase of a new car. Although it may be that an actual contract has not been formed, Y may still be able to claim detrimental reliance, if X does not pay Y the bonus. If a judge agrees that it is a case of detrimental reliance, then X would have to pay Y the amount of the bonus. Y could pay off his car loan.
If an Employee Is Terminated, Must an Employer Still Honor a Promise To Pay an Employee Bonus?
If the employment of an employee who is promised a bonus in a valid contract of employment is terminated, the employer might still be obligated to pay the terminated employee a bonus. It would depend on the circumstances of the case.
It may be that the employment was terminated for perfectly good reasons and possibly by mutual agreement of the parties. But, again, the main issue would be whether the employee fulfilled their part of the employment agreement with the employer and the contract provided that the performance of the employee was to be compensated in part by payment of a bonus.
So, to look again at the example of a salesperson who is promised a bonus in exchange for reaching certain sales goals, if the salesperson achieved the promised goals before their employment was terminated, a court may well find that the employer must pay the promised bonus.
How Can a Texas Employment Lawyer Help Me?
If you have not been paid a bonus by your employer when you expected, you want to consult a Texas employment lawyer. Your lawyer can review the facts of your case and advise you as to whether or not you have good cause to demand payment.
As an employer, you may have promised bonuses to an employee or employees of your enterprise. A Texas employment lawyer can advise you whether or not you are obligated to pay. It might also be best practice to consult a lawyer before announcing the promise of bonus payments in order to know how to do this in such a way as to give yourself the flexibility you need given business uncertainties.
