Practice Tip: Contract Language for Employee Bonuses
In a recent, but unpublished, decision, the court of appeals interpreted the language of a contract that set a formula for calculating a bonus for a sales employee. The dispute centered on the following contract term:
The Company will be the sole and final arbitrator with respect to interpretations and application of all aspects of this Plan including, but not limited to the amount of commission and/or bonus due any plan participant.
The company argued that the “sole and final arbitrator” phrase permitted it discretion in determining the amount to paid to the employee, despite the formulas established in the contract. The employee agreed that the company reserved discretion, but argued that it exercised it unreasonably. The court, however, disagreed with everyone:
This language does not convey general discretion, limited or absolute, to determine a bonus amount. Rather, it states that if a dispute arises over the meaning of an agreed upon formula, CNH will be the final arbitrator of that dispute.
The decision is a fairly well-supported, if very literal, interpretation of the specific language. However, it’s certainly worth reading, particularly if your company uses bonus contracts that attempt to reserve discretion in the calculation. Take care with your language, and say what you want to say. While contracts can never be written to cover every contingency, it’s best to get a few eyes on the language before you make any big decisions.
The most tragic part of this case, from the clients’ points of view, is that the roughly $30,000 dispute ended up in the court of appeals.
