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Discretionary Bonuses Based in Part on Employer's Performance Do Not Fall Within the Definition of "Wages" Protected by New York's Wage Payment Statute

October 25, 2000

In Truelove v Northeast Capital & Advisory, Inc., 3 No. 99 (NY Ct. App. 2000), a case of first impression in New York, the state's highest court ruled on October 17, 2000 that discretionary bonuses based on an employer's financial success are not "wages" as defined by New York's wage payment statute, and may therefore be lawfully withheld from an employee who resigns prior to the date on which the bonus is scheduled to be paid.

Under Labor Law § 193, no "employer shall make any deduction from the wages of an employee." Labor Law § 190(1) defines "wages" as earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis. An employee who brings suit to recover improperly withheld wages can recover attorney's fees and, in addition, a penalty of 25% if a willful violation is found.

Defendant Northeast Capital & Advisory, Inc., a small investment banking firm, hired Plaintiff William B. Truelove as a financial analyst. Truelove participated in a bonus plan which provided for the establishment of a bonus/profit sharing pool in the event that the firm reached its minimum revenue goal; distributions from the pool were allocated at the CEO's discretion. Distributions (if any) were paid in quarterly installments, with each distribution contingent upon the participant's continued employment with the firm.

At the end of 1997, Truelove was allocated $160,000 from a bonus/profit sharing pool of $240,000. Truelove received an initial distribution of $40,000, but the firm refused to pay subsequent distributions to him because he had resigned his employment in the interim. Truelove sued the firm, alleging that his distribution from the profit sharing pool constituted "wages" under Labor Law §190(1), and that the firm violated Labor Law § 193 by conditioning payment of the bonus on his continued employment. The trial court granted the firm's motion for summary judgment, holding that the bonus did not constitute wages under the N.Y. Labor Law, and the intermediate appellate court affirmed.

The New York Court of Appeals, agreeing with the lower court decisions in Truelove, concluded that the statute's narrow definition of wages excludes contingent incentive plans that are based in part on the employer's performance, and includes only that compensation which bears a direct relationship to the employee's own performance. The Court of Appeals concluded that Truelove's bonus payment was not based on his own productivity, nor did he have a contractual right to receive that bonus. Instead, Truelove's bonus was a discretionary payment tied to the financial success of the firm. Finally, the Court rejected Truelove's argument that he had a "vested" right to receive the forfeited bonus payments, explaining that his entitlement to the bonus was governed by the terms of the firm's bonus plan, which provided for forfeiture of bonus payments upon an employee's resignation from the firm.

Consistent with the Court of Appeals' unanimous decision in Truelove, employers in New York are permitted to condition the receipt of a bonus payment on an employee's continued employment, provided the bonus is discretionary and is based at least in part on the employer's performance.