Bonus requires good faith
Published 12/03/04

An employment bonus program must be administrated in good faith and fairly.

Worker bonuses are often tied to both the company's overall success during a particular period of time and the worker's contribution towards that success. The formula for the bonus often includes elements which may be within the control of officers of the company, such as the timing of how much revenue has been generated during that period of time, and how many expenses have been incurred.

With that discretion comes an obligation of fairness. Particularly, in every contract in New Hampshire there is an implied covenant of good faith performance and fair dealing which excludes behavior inconsistent with common standards of decency, fairness and reasonableness, and with the parties agreed upon common purpose and justified expectations.

If an officer of a company specifically decides to instruct a customer not to pay an accounts payable until the beginning of the next fiscal year so that the revenues do not show up during that year in order to justify not giving a large, or any, bonus to the worker under a compensation agreement, the company may have breached its implied duty of good faith performance and fair dealing with regards to its contract for compensating that worker.

Likewise, if a company officer was to make an extraordinary payment of company expenses that fiscal year to justify not paying a bonus, that may also, under the appropriate circumstances, result in a breach of the implied duty of good faith performance and fair dealing of the company to the worker.

Of course, there may be legitimate business reasons for such decisions unrelated to trying to prevent a bonus from being paid that may legitimately justify the officer's decisions. For example, the officer may have told a customer that it did not have to pay an account payable at that point in time until the problem with the defective equipment sold to it was repaired. That officer's response to a customer complaint would appear on its face to be a legitimate business decision for deferring income unrelated to the intent to thwart the worker's otherwise potential bonus rights.

There can be legitimate business reasons to have a bonus agreement with a worker that is based on a formula dependent upon her and the company achieving certain milestones rather than having a bonus that is purely at the discretion of the company.

However, when such a decision is made, management should be cognizant that with such an agreement comes the implied covenant of good faith performance and fair dealing and management may not have the ability to rework the company's cash flow in or expenses out during that period for the purpose of avoiding the justified expectations of a bonus of the worker based upon the compensation.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and business persons on a variety of legal issues, including employment, and advocating on their behalf. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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