Bonuses and the FMLA Featured

8:00pm EDT May 26, 2008

As an employer, you may not be aware of how the Family and Medical Leave Act (FMLA) affects bonus pay.

According to a 2006 court case, you may prorate (reduce) a production bonus — but not an “absence-of-occurrence” bonus — for employees who are absent on leave under the FMLA.

“You may not reduce an absence-of-occur-rence bonus if the employee would have qualified for the bonus had he or she not taken FMLA leave,” says Craig Snethen, a senior associate of Jackson Lewis LLP. “However, you may prorate a production bonus by the amount of lost production — hours or other quantifiable measure of productivity — caused by the FMLA leave.”

Smart Business spoke with Snethen about how the courts interpret FMLA-related bonus conflicts.

What bonus programs are affected by FMLA?

The Department of Labor interprets the FMLA relative to two varieties of bonus programs: an ‘absence-of-occurrence bonus,’ like a bonus for perfect attendance, and a ‘production bonus,’ like a bonus based on hours worked, number of items manufactured or some other productivity measurement. Generally, a production bonus requires some positive effort on the employee’s part at the workplace, while an absence-of-occur-rence bonus merely rewards an employee for compliance with the rules.

What precedents have the courts set?

In Sommer v. Vanguard Group, the U.S. 3rd Circuit Court of Appeals ruled that an employer did not violate the FMLA when it reduced a former employee’s annual bonus payment based on the employee’s eight-week FMLA leave. The employer’s bonus program defined ‘hours worked’ as the actual hours for which an employee is paid or entitled to be paid for performing duties or for vacation, holidays or sick time. However, the policy explicitly excluded unpaid leaves of absence under disability programs from the definition of ‘hours worked.’ Similarly, the employer had a practice of prorating the bonus based on absences due to workers’ compensation and personal leave. The court observed that the FMLA regulations do not require the equal treatment of employees who take unpaid forms of FMLA leave and those who take paid leave. Doing so would be incompatible with FMLA regulations, it ruled, because it would entitle employees to accrue rights or benefits that would not have been available had their leaves not been designated as FMLA leaves. Therefore, because the employer’s policy explicitly excluded FMLA leave and other forms of unpaid non-FMLA leave from the definition of ‘hours worked,’ the employer’s proration of the productivity bonus based on the employee’s unpaid FMLA leave was proper.

Why should bonus programs be in writing?

If you have an unwritten bonus program, the Sommer decision underscores the importance of putting it in writing in order to maximize the likelihood that it will be interpreted consistent with your intent. Further, a written policy covering various types of unpaid non-FMLA leave will constitute evidence that you do not discriminate against employees who take FMLA leave and/or discourage employees from availing themselves of rights under the FMLA. In drafting written bonus programs, you should clearly establish your goals in simple, easy-to-understand terms. Defining an employee incentive as a production or absence-of-occurrence bonus can determine your right to prorate a bonus based on an employee’s absence. To that end, you should be conscious of this critical distinction when formulating a written bonus program. We also encourage you to review any existing bonus programs to maximize the likelihood that such programs be construed as production bonuses. Because the plaintiff in the Sommer case attempted to bring the claim as a class action, the importance of carefully preparing and reviewing written bonus programs to maximize your right to lawfully prorate employee bonuses under the FMLA cannot be overstated.

What are the primary dangers inherent when an employer doesn’t put a complete and specific bonus program in writing?

One danger is that the bonus program can be interpreted in a manner inconsistent with your intent, therefore, you may be deprived of an opportunity to prorate a bonus based on an employee’s absence under the FMLA. Another danger is that you are deprived of the opportunity to present it as evidence in an FMLA discrimination/interference action.

Should there be a separate written communication to employees about bonus programs?

You should be able to demonstrate that employees have access to, or are otherwise aware of, the program’s terms. The mechanics of the manner in which this is accomplished is up to you. In a perfect world, each employee would sign an acknowledgement that he or she received a copy of the program. However, as a practical matter, this often may not be feasible. At a minimum, written bonus programs should be circulated to employees in the most efficient manner possible. If you provide annual employee handbook updates, these programs may be included in the updated handbook. You may also circulate the written program to employees via electronic means or at least let them know of the written program and direct them to a central site.

CRAIG SNETHEN is a senior associate of Jackson Lewis LLP. Reach him at (412) 232-0196 or snethenc@jacksonlewis.com.