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Do You Owe Someone a Bonus If They Never Actually Worked for You?

Do You Owe Someone a Bonus If They Never Actually Worked for You?

It is not unusual for an employer to rescind an employment offer due to changed circumstances. That is why it is important when drafting a formal employment offer—a type of contract—to be as precise as possible when describing the terms and conditions. If the offer is later rescinded, properly drafted language can protect you from having to pay out.

In the Matter of Lehman Brothers Holdings, Inc.

Here is a recent example from a decision by a federal court in New York. This case involves a would-be employee of the now-defunct financial services firm Lehman Brothers. In 2007, a few months before the company declared bankruptcy, Lehman Brothers hired someone for an executive position in its Fixed Income Division. Lehman Brothers made a contract offer to the woman via letter.

The letter spelled out the proposed compensation terms, including a “minimum bonus in the amount of $350,000” payable by January 2008. The bonus was payable provided the person maintained “good standing” with all applicable licensing agencies and had not been terminated for cause—i.e., because of misconduct or illegal actions. The letter also stated the woman was an at-will employee and her employment could be terminated by either side “at any time for any reason,” with 30 days notice.

A few days after sending the letter, Lehman Brothers rescinded its employment offer. The parties disagreed as to the reason. Lehman Brothers said it disagreed with the woman's decision to participate in a graduate degree program that would require her to take away too much time from the firm. The woman alleges Lehman Brother illegally retaliated against her for filing gender discrimination claims with the U.S. Equal Employment Opportunity Commission (EEOC) against two former employers. (The woman subsequently filed an EEOC complaint against Lehman Brothers, which is not addressed in the case discussed here.)

Whatever the reason, Lehman Brothers rescinded the letter and the woman never worked a day at the firm. She nonetheless sued Lehman Brothers for breach of contract, specifically claiming she was entitled to the $350,000 bonus. She argued she was still a Lehman Brothers employee the moment she agreed to the terms contained in the letter. She also pointed to the fact she was listed as an employee in Lehman Brothers' human resources system.

Because Lehman Brothers had already entered bankruptcy by this point, the woman's claim was heard by a federal Bankruptcy Court judge in New York. That judge—and subsequently a U.S. District Court judge overseeing the bankruptcy court—dismissed the lawsuit in its entirety. As the District Court judge explained, “On an intuitive level, [the woman] did not work for LBI and is therefore not entitled to a performance bonus.” Her alleged status as an employee was “academic,” the judge said, as “she did not do a single minute of work for LBI, which is why she did not receive a single penny of salary.” The bonus itself was for performance, the judge held, not merely for signing the contract.

Get Help With Your Contracts

Employment agreements are just one type of contract businesses must deal with every day. Contracts are complex legal documents, and as such, you should always work with a qualified New York business attorney before entering into any agreement. Contact our office today to speak with an attorney right away.

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