Production bonuses may be prorated without violating FMLA

December, 2006

A recent opinion by the U.S. Court of Appeals for the Third Circuit held that an employer may prorate an employee's production bonus based on the number of hours actually worked without violating with the employee's rights under the FMLA.

In Sommer v. The Vanguard Group, 461 F.3d 397 (3d Cir. 2006), an employee took almost eight weeks of short-term disability leave under the FMLA. The employer then prorated the amount of the employee's year-end bonus based on the number of hours he had actually worked. The employee sued, alleging that the proration of his bonus interfered with his right to take leave under FMLA.

To determine whether the employer's bonus proration policy violated the FMLA, the Sommer court focused on whether the bonus policy was based on production or an "absence of occurrence." A production-based bonus focuses on the employee's performance, such as the number of hours worked or accrued earnings. An "absence of occurrence" bonus is not performance-based but instead focuses on the employee's mere compliance with the rules. For example, a bonus given for perfect attendance is considered an "absence of occurrence" bonus.

The court held that Vanguard's bonus policy was production-based and, therefore, proration was permissible under the FMLA. The employer's proration policy applied not only to FMLA leave but to several non-FMLA leaves of absence as well. The production goal of the bonus policy had been communicated throughout the employee manual, which stated that bonus amounts would be based on the hours worked and prorated for every hour that is less than the annual goal, including for leave time "no matter how short the amount of time the crew member is on leave, from a few hours to a few months." Thus, the court held that the employer's policy of prorating production-based bonuses where an employee takes FMLA leave did not unlawfully interfere with that employee's exercise of his FMLA rights.

Tips for Employers

In light of Sommer, employers should review their employee manuals and bonus policies to ensure that any bonus policy clearly states whether it is production-based (i.e., based on the number of hours worked or on earnings accrued) and, if so, the types of leaves that will trigger proration. If FMLA leave will trigger proration, the bonus program should require proration for other types of leaves as well to avoid claims that the bonus program discriminates against employees who take FMLA leave. If the bonus policy is based on an "absence of occurrence," then employers should ensure that an employee receives the same bonus to which he or she would have been entitled but for FMLA leave and not a prorated amount. Otherwise, employers leave themselves vulnerable to FMLA interference claims.

Please contact your Bullivant employment counsel for further information.