In Sommer v. Vanguard Group, 461 F.3d 397 (3d Cir. 2006), the Third Circuit Court of Appeals concluded that an employer may, under certain circumstances, reduce an employee’s bonus because of absences protected by the Family Medical Leave Act (FMLA). The ruling affects employers in Pennsylvania, New Jersey, Delaware, and the Virgin Islands.
Nevertheless, because this is the first federal appellate decision to hold that an employer may prorate an employee’s bonus during a period of FMLA leave, Sommer will likely be relied upon by other jurisdictions as persuasive authority. The decision provides guidance for employers who wish to implement similar policies and prorate employee bonuses when employees have taken protected FMLA leave.
Background
Vanguard Group’s Partnership Plan provided for an annual bonus under certain specified circumstances. To qualify for a bonus under the Partnership Plan (the Plan), the recipient had to be employed “1) on the last calendar day of the year, 2) on the date of the Plan’s distribution, and 3) all days in between” (Sommer, 461 F.3d at 402.).
The amount of the bonus depended on three criteria: “1) job level, 2) length of service to the company, and 3) hours worked” (Id.). Employees were required to work a minimum of 1,950 hours, and their bonuses would be prorated if they did not meet this minimum.
Importantly, the Plan provided that “[a]ny employee who is on a disability leave of absence under the company’s short-term or long-term disability program shall not be credited with hours of service during such leave of absence” (Id.).
While employed by Vanguard Group as a Financial Administrator, Plaintiff Robert Sommer took eight weeks of short-term disability leave which he claimed was covered by the FMLA.1 Because of the absence, Vanguard prorated the bonus payments received by Sommer under its Plan.
Disagreeing with his employer’s decision to prorate his bonus, Sommer filed suit against Vanguard Group, claiming that the reduction in his bonus violated the FMLA’s prohibition against interfering with an employee’s receipt of FMLA leave. Sommer also sought class certification of his claims on behalf of “similarly situated” employees.
Vanguard Group moved for summary judgment on Sommer’s claim and the district court granted the motion. Sommer appealed the decision to the Third Circuit Court of Appeals.
Legal Analysis
In affirming the district court’s ruling, the Third Circuit Court of Appeals first took note of the policy considerations underlying the FMLA. Specifically, the court recognized that the FMLA was not intended to provide employees with greater rights than they would have had if they had not taken FMLA leave (Sommer, 461 F.3d at 399, citing 29 U.S.C. § 2614(a)(3)(A),(B)).
The court then considered the Department of Labor (DOL) regulations, which distinguished between two types of bonuses: “production” and “absence of occurrence” (Id., citing 29 C.F.R. § 825.215, 220).
According to the regulations, a production bonus is one that “requires performance by the employee” (Id.). For instance, a production bonus could be awarded for billing a certain number of hours, or selling or producing a particular number of products.
On the other hand, an “absence of occurrence” bonus is one that rewards an employee for compliance with the employer’s rules. Such bonuses would include safety bonuses and bonuses for perfect attendance (Id.). The court also considered a number of opinion letters issued by the DOL, which suggested that an employer could lawfully prorate production bonuses, but not absence of occurrence bonuses (Id. at 400-01).
Relying on both regulations and DOL opinion letters, the court concluded that an employer could lawfully prorate any production bonus by the amount of any lost production caused by the FMLA leave (Sommer, 461 F.3d at 401).
On the other hand, the court held that an employer could not lawfully reduce an absence of occurrence bonus based on FMLA leave if the employee were otherwise qualified for the bonus, but for the leave (Id.).
Next, the Third Circuit examined Vanguard’s Plan and concluded that it provided a production bonus as opposed to an absence of occurrence bonus. In reaching this conclusion, the Third Circuit relied upon the following characteristics of the Plan.
• the Plan was designed to recognize an employee’s contributions to the employer’s growth and success;
• under the Plan, qualifying bonus amounts were based on hours worked and were prorated for every hour that employees were below an annual goal;
• under the Plan, the bonus payment was always prorated for the leave time, no matter how short the amount of time the employee was on leave, from a few hours to a few months;
• during the time employees are on leave, they were not actively contributing to the employer’s overall performance;
• the Plan provided that a numerical target had to be met (e.g., number of hours worked, dollar amount of sales reached, or number of products to be produced);
• bonus payments were prorated for other leaves, not just FMLA leave (e.g., long-term disability, workers’ compensation, personal leave, and unpaid court leave).
Because Vanguard’s Partnership Plan provided for a production bonus, the court ruled that the company had not interfered with Sommer’s rights by prorating his bonus based on his eight-week absence from work.
Implications of the Sommer Decision
Providing bonuses helps employers stay competitive by allowing them to manage fixed costs, keep a strong bottom line and motivate their employees. The growing use of bonus compensation makes the distinctions between production and occurrence bonuses of serious practical consequence. The Sommer case makes clear why this is important.
In Sommer, a single employee sued for the modest amount of $1,788.22. However, Sommer’s attorneys also sought class certification. A class action lawsuit, especially against a large employer, based on the difference between prorated bonuses and full bonuses could result in hundreds of thousands of dollars in potential liability.
Therefore, if an employer wants the option of prorating bonuses, it should ensure that its bonus plans are drafted such that they can be successfully defended as production bonuses. Employers that wish to implement similar plans or would like to assess the lawfulness of their existing bonus plans are encouraged to contact an experienced labor and employment attorney for assistance.
Footnote
1 The court did not decide whether Sommer had a “serious health condition” which would warrant FMLA coverage, because it ruled that his interference claim failed as a matter of law for other reasons (Sommer, 461 F.3d at 401 n.5).
Patrick H. Hicks is the Founding Shareholder of the Reno and Las Vegas Littler Mendelson offices. Hicks is Nevada’s most experienced employment law litigator and trial attorney, and he regularly appears in all state and federal courts in Nevada and elsewhere. He can be reached at phicks[at]littler.com.
Deborah L. Westbrook is an associate at Littler Mendelson in Las Vegas. She can be reached at dwestbrook[at]littler.com.
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