3rd Circuit: Appeals court upholds employer's right to prorate bonus under FMLA

By Jonathan Hafen Sep 15, 2006
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In a case of first impression, the 3rd U.S. Circuit Court of Appeals ruled that employers may prorate production-based bonuses of employees taking leave under the Family and Medical Leave Act (FMLA).

Robert Sommer alleged that the FMLA prohibits employers from reducing bonuses based on hours worked when the targeted hours were missed due to unpaid FMLA leave. In affirming a district court ruling dismissing the claim, the appellate court held that employers are allowed to prorate “production bonuses,” even though “absence of occurrence” bonuses, such as those awarded for perfect attendance, could not be reduced.

Sommer worked for the Vanguard Group as a financial administrator. In late 2000 and early 2001, Sommer took two months unpaid leave under FMLA, claiming “major depression and generalized anxiety.” Due to this absence, Vanguard prorated Sommer’s bonus under its partnership plan, reducing it by $1,788.23.

Vanguard terminated Sommer on May 14, 2004, for misrepresenting his qualifications to act as a financial administrator. The following month, Sommer sued, alleging Vanguard violated the FMLA by prorating his partnership plan bonus.

Vanguard established its partnership plan in 1984 to reward employees for personal and corporate achievement. Under the plan, employees working at least 1,950 hours received a full bonus. Those working fewer hours received a prorated bonus.

Vanguard’s policy specifically stated that “time spent on leave is not considered time worked” and the bonus was “ always prorated for leave time” (emphasis in original). The policy made no distinction between types of leave.

On summary judgment, the district court dismissed Sommer’s claims, finding the partnership plan bonus was production-based, for which proration is allowed.

On appeal, Sommer contended the district court incorrectly classified the partnership plan as a production bonus rather than an absence of occurrence bonus. In considering this argument, the appellate court noted that, under the FMLA and a 1994 Department of Labor Opinion Letter, an employer may prorate a production bonus for FMLA leave, whereas an absence of occurrence bonus, such as for perfect work attendance, cannot be compromised by FMLA leave. Sommer argued he qualified for a full “absence of occurrence” bonus because he was employed on the last day of the calendar year, the date of distribution, and all days in between.

The appeals court disagreed, affirming the lower court and holding “Sommer’s argument that the plan is an absence-of-occurrence bonus because qualification hinges upon continued employment ignores the simple fact that, beyond the plan’s qualification requirements, there is an hours-based annual production requirement.”

Sommer also asserted that even if the partnership plan was a production bonus, prorating a bonus for FMLA leave improperly interfered with FMLA rights because employees taking other forms of leave, such as sick time or vacation, were not subject to bonus proration under the policy. Specifically, Sommer argued such disparate treatment violated §825.215(c)(2) of the regulations, which provides that employees taking FMLA leave must have “the same consideration” as those taking “paid or unpaid leave.” Sommer alleged such discrimination constituted an FMLA “interference claim” because it discourages employees from taking FMLA leave.

The appeals court rejected this argument for three reasons. First, §825(c)(2) relates only to the qualification and consideration for bonuses, not their calculation. Second, requiring employers to make no distinction between employees taking paid leave and employees taking unpaid leave would violate the FMLA, which expressly states an employee taking leave “shall not be entitled to `the accrual of any seniority or employment benefits during the period of leave.’ ” Finally, accepting Sommer’s argument would effectively put unpaid FMLA leave on par with vacation and sick leave, which is not what Congress intended in enacting the legislation.

Sommer v. Vanguard Group, 3rd Cir., No. 05-4034 (Aug. 24, 2006).

Professional Pointer: In establishing compensation plans it is critical to distinguish between “production bonuses,” which are paid due to accomplishments of employees while at work, such as total annual hours worked, with “absence of occurrence bonuses,” which reward compliance with company rules, such as safety and attendance policies. In addition, employers may prorate production bonuses to account for unpaid leave, such as FMLA leave, workers’ compensation leave, short-term disability and so forth. So long as all types of company unpaid leave are treated equally, prorating a production bonus due to unpaid leave will not violate the FMLA.

Jonathan Hafen is an attorney with Parr Waddoups Brown Gee & Loveless in Salt Lake City.

Related article:

Denial of leave bonus did not violate FMLA, HR News, Oct. 14, 2005.

Editor’s Note: This article should not be construed as legal advice.

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