The Third Circuit Court of Appeals (which has appellate jurisdiction over New Jersey, Delaware, Pennsylvania, and the U.S. Virgin Islands) recently ruled that an employer may prorate an employee's production bonus based on FMLA-protected absences. In Sommer v. The Vanguard Group, No. 05-4034, 2006 U.S. App. LEXIS 21638 (3d Cir. Aug. 24, 2006), the court found that the employer did not interfere with the plaintiff's FMLA rights when it it reduced a former employee's annual production bonus payment to reflect the employee's eight-week FMLA leave absence. The decision offers employers guidance on structuring bonus programs that reduce payments based on employee leaves of absence that comply with the FMLA.
Under the Vanguard Group's bonus plan, the amount of the annual bonus a qualified employee could receive depended on the level of the employee's job, the length of the employee's service with the company, and "hours of service." The Plan defined "hours of service" as the actual hours for which an employee is paid or entitled to by paid by the Company for the performance of duties, vacation, holidays, sick time, or an approved leave of absence. Excluded from "hours of service" was any time an employee was on disability leave, workers' compensation, FMLA leave, personal leave, and court leave during the Plan year or at distribution time. To be entitled to the full annual bonus an employee must have at least 1,950 hours of service. If an employee does not meet the 1,950 hours of service requirement, the annual bonus is prorated by the amount of hours that the employee is deficient. The proration percentage is the number of hours the employee worked divided by 1,950. The percentage is then applied to the full amount of the annual bonus to obtain the prorated annual prorated bonus of the employee.
Sommer was on short-term disability leave/FMLA leave for approximately eight weeks during the 2001 Plan Year. Because of his absence, Vanguard prorated his bonus payment. As a result of proration, Sommer's bonus payment was reduced by $ 1,788.23. Sommer sued his employer alleging that the proration interfered with his FMLA rights. The federal District Court subsequently awarded summary judgment to Vanguard after finding that the bonus plan was a production bonus and, as such, proration was permitted. Sommer appealed the District Court's finding that Vanguard's proration of his onus did not interfere with his FMLA rights.
Sommer argued that the District Court incorrectly classified the bonus plan as a production bonus (which permits proration for time spent on the FMLA) and not for the absence of an occurrence (under which proration is not allowed). Alternatively, Sommer argued that, even if the Vanguard bonus Plan is a production bonus, it still interferes with his FMLA rights because the company prorates the bonuses of those who take unpaid forms of FMLA leave but does not similarly prorate the bonuses of those who take paid forms o leave, such as vacation or sick leave. He argued that this disparate treatment violates the FMLA regulatory direction that FMLA-leave taking employees be afforded "the same consideration" as those who go "on paid or unpaid leave."
The DOL treats production bonuses differently from absence of occurrence bonuses. Bonuses for perfect attendance safety (absence of injuries or accidents on the job) do not require performance by the employee but rather contemplate the absence of occurrence. Production bonuses, on the other hand, do require performance by the employee. If an employee is on FMLA leave during any part of the period for which the bonus is computed, the employee is entitled to the same consideration for the bonus as other employees on paid or unpaid leave. 29 CFR 825.220(b). The Court also reference several DOL opinion letters detailing how companies should compute the bonuses of those who employees who take leave. Essentially, employers may prorate the production bonuses of employees who take FMLA leave. Employers may not, however, reduce absence of occurrence bonuses of employees who take FMLA leave. A 2000 DOL opinion letter specifically sanctioned the use of the percentage of actual hours worked as the basis for calculating the proration of a production bonus for an employee's use of FMLA leave.
The Court found that the Vanguard bonus plan was "more akin to a bonus program that rewards employee production." The Court cited the following factors in determining that Vanguard's bonus plan was a production bonus:
- it was designed to incentives employees to contribute to Vanguard's performance;
- during the time an employee is on leave the employee is not contributing to Vanguard's performance;
- the production goal and proration of bonus amounts for hours worked is communicated to the employees throughout the policy;
- bonus payments were always prorated for leave time no matter how short the leave period;
- a numerical target (1,950 hours) was one of several factors, including Vanguard's operating performance, its competitors' operating performance, the performance of the securities markets, the investment performance of Vanguard's funds, and company earnings;
The court concluded this issue by observing:
Sommer's argument that the Plan is an absence of an occurrence bonus because qualification hinges upon continued employment ignores the simple fact that, beyond the Plan's qualification requirements, there is an hours-based annual production requirement.
The Court also rejected Sommers alternative argument that, even if the Plan is a production plan, it interferes with his FMLA rights because it treats unpaid FMLA leave different than paid forms of leave. As you may recall, the Plan counted paid sick and annual leave towards the 1,950 hours of service requirement. The Court found that 29 CFR 825.220(c)(2) does not require equal treatment of those who take unpaid forms of FMLA leave and those who take paid leave. First, 29 CFR 825.215(c) addresses qualification and consideration for bonuses not their calculation or proration. Second, reading 825.215(c)(2) to require employers to calculate production bonuses for those to take unpaid FMLA leave the same as those who take paid leave would violate the very terms of the FMLA. The Statute provides that an FMLA leave taker is not entitled to the accrual of any seniority or employment benefits during any period of leave, or to any right, benefit or position of employment other than any right, benefit, or position to which the employee would have been entitled had the employee not taken leave. Sommer took short-term FMLA leave. Had he not designated leave as FMLA leave, he still would not have had his bonus prorated. By asking the Court to treat his short term disability/FMLA leave the same as sick or vacation leave (which are not prorated), Sommer was asking the court to provide him with rights and benefits that he would not otherwise be entitled to receive. "Such a result is clearly incompatible with the terms of 29 USC 2614(a)(3)(A).
Comment: The decision of the Third Circuit in Sommer certainly will encourage employers to modify existing bonus plans to enable proration of employee bonuses for FMLA leave usage. To avoid litigation, employers must carefully structure their bonus plans so that the plan falls within the production bonus exception. Given that likely prospect of class action litigation inherent with bonus plans, employers should exercise extraordinary care in this area.