In California, once a bonus has been promised to an employee, and the employee performs all of the conditions necessary to receive the bonus, the bonus is considered wages that must be paid. Eligibility for a bonus payment is determined by the terms of the bonus plan. A recent Court of Appeal case, Neisendorf v. Levi Strauss & Co., has confirmed that employers are free to establish bonus plans which condition bonus payment on the employee’s continued employment with the company as of the payout date.

In Neisendorf, the employer maintained two bonus plans. Both bonus plans were based, at least in part, upon the company’s performance during the fiscal year. The terms of each bonus plan provided that an employee was ineligible to receive a bonus if he or she was involuntarily terminated prior to the bonus payout date. Neither plan specified a precise bonus payout date, but indicated that bonus payments were usually made in January or February of the following fiscal year. 

The plaintiff in Neisendorf was terminated for unsatisfactory performance in November 2002. Bonuses were paid to employees in February 2003. The plaintiff was not paid a bonus in February 2003 because she had been terminated for cause prior to the bonus payout date. 

The plaintiff argued that, because the company determined bonuses based on the company’s profits during the fiscal period during which she had worked, she had earned her bonus. She argued that the company’s requirement that an employee be employed at some indeterminate date in the following fiscal year to be eligible for a payout essentially amounted to an illegal forfeiture of earned compensation.

The Court of Appeal disagreed, holding that an employer is not required to provide a bonus to an employee unless and until an employee has fulfilled all conditions of the bonus plan in accordance with the terms of the bonus plan. The court held that, because the terms of the bonus plans explicitly precluded employees who had been involuntarily terminated prior to the payout date from receiving a payout, and because the plaintiff had been terminated for cause before the bonus payout date, she had not met all of the conditions of the bonus plans and was not eligible for a payout. 

In light of Neisendorf, employers may wish to review the terms of their bonus plans to ensure that the plans explicitly identify any conditions employees must meet to receive a bonus payout under the plans.

The Neisendorf decision is also important in that it held that employers are not required to provide reasonable accommodations to employers returning from leaves of absence protected by the California Family Rights Act. Click here to view the update: Employers Are Not Required To Provide Reasonable Accommodations To Employees Returning From Leaves Protected By The California Family Rights Act.