February 15, 2018
Employers who implement bonus programs to attract and retain key employees may be bound to the terms of those programs, the 8th U.S. Circuit Court of Appeals recently held. In Boswell v. Panera, LLC, the court affirmed that the Panera restaurant chain was required to pay uncapped bonuses to restaurant general managers based on the profitability of their stores, despite Panera’s attempt to cap the bonuses. This decision highlights that employers who implement such programs must use clear language to reserve the right to modify or terminate the program, or risk being stuck with the original terms.
In an effort to recruit and retain restaurant general managers, Panera had created a bonus program under which qualifying managers were eligible for a one-time bonus payment based on a formula. Store profitability was a significant factor in determining the amount of the bonus. General managers signed agreements under which the bonuses would be paid about five years after execution of the agreement, provided the general manager was employed on the date on which the bonus was payable.
After the agreements were executed, Panera decided the bonuses would be too costly and in 2011 announced a $100,000 cap on the amount of the bonus; the cap would become effective in 2012.
In 2014, three general managers whose bonuses were capped sued on behalf of a class, claiming that Panera breached the agreements by imposing the cap. Panera raised several defenses to the claims, including that the purpose of the agreements had been commercially frustrated by an economic downturn. (In other words, Panera was not profiting as expected from the bonus program.) Panera also said it had expressly reserved the right to revoke or modify the bonus program by conditioning the bonus payment on the general manager’s continued employment and reserving the right to adjust the bonus metrics.
The district court certified a class of 67 general managers and granted summary judgment in their favor. The district court held that Panera had extended an offer for a unilateral contract, which became irrevocable once the general managers rendered substantial performance. The district court rejected Panera’s contract defenses, finding that Panera did not promise to do anything it was not already obligated to do so there had been no novation, and that the general managers did not waive their claims by continuing to work after the cap was announced. Finally, the district court rejected Panera’s commercial frustration argument because an economic downturn was foreseeable.
The 8th Circuit affirmed. The court agreed that an employment relationship is a unilateral contract under Missouri law. Importantly, the court also rejected Panera’s argument that it expressly reserved the power to revoke or modify the offer by conditioning the bonus payment on the general manager’s continued employment and reserving the right to adjust the bonus metrics. The court suggested that perhaps Panera could have reserved its power to modify or terminate the bonus program if it had expressed this condition in clear language. The court cited as an example an earlier case, in which an employer had stated that its bonus program was “a voluntary contribution on the part of the company” and that the bonus “may be withheld, increased, decreased or discontinued, individually or collectively, with or without notice.” However, Panera’s agreement did not contain such language, and thus, it could not change the formula or even cap the payout.
Boswell stands for the proposition that an employer that offers a bonus program to attract and retain key employees will be bound by that offer, even if the employees are at-will. This leaves employers vulnerable to unanticipated consequences, especially when a bonus is nondiscretionary and based upon financial performance or other metrics. Employers should be sure that bonus and incentive programs contain clear language reserving the right to modify or terminate the program after employees have begun performance.
For more information on this topic, please contact the authors, your McGuireWoods contact, or a member of the firm’s labor and employment group.