Employees Not Entitled To Bankrupt Employer Bonus

March 5, 2003 (PLANSPONSOR.com) - Discharged employees of a bankrupt company's successor were not entitled to payment of incentive bonuses out of the former employer's bankruptcy proceeds, according to a federal judge.

The US District Court for the Northern District of Illinois upheld a bankruptcy court’s decision in Galietta v Comdisco Holding Co. that the employer’s incentive plan was not an enforceable contract.   This determination came as the district court found the contract clearly warned employees that there was no vested right to the incentive pay, according to Washington-based legal publisher BNA.

With this ruling, the court rejected the employees’ argument that they could not be forced to forfeit their bonuses due to the fact that they were not employed by the employer’s successor on the date their employment was terminated. The court instead found the original employer “was in no way involved” in the employees’ inability to meet the plan’s requirement that they be actively employed at the time the incentive bonuses were paid since it was the employer’s successor that terminated the jobs.

The Plan

Comdisco Inc. filed for Chapter 11 bankruptcy protection in July 2001, leading to a reorganization as Comdisco Holding Co.   This move included the sale of its worldwide disaster recovery services to SunGard Data Systems Inc.

Before the unit was to be sold to SunGard, Comdisco set up an employee incentive plan to “boost morale and discourage resignations among key employees.” The plan provided employee incentive bonuses on December 1, 2001, and February 15, 2002 based on certain targets. However, if an employee were discharged for any reason prior to either of these payment dates, they would then be ineligible to receive payments under the plan.

SunGard completed the purchase in November 2001 and certain Comdisco employees became employees of SunGard. On December 1, 2001, Comdisco paid its former employees incentive pay but, on December 20, 2001, SunGard eliminated those employees’ positions, thus making them ineligible for the February 15, 2002, payout.

Following Comdisco’s refusal to pay the bonuses in February, the former employees sued the company alleging the failure to pay violated the Illinois Wage Payment Collection Act.

Not Vested

The district court, disagreeing with the ex-employees’ argument, noted that the Illinois Wage Payment Collection Act only applied if Comdisco had a contractual obligation to pay the bonuses. The incentive plan was not a contract because it contained a “no vested rights” provision that made clear that the employees had no guaranteed right to payment.

“[T]he ‘no vested rights’ provision in this case clearly and unequivocally states that the plan is not a contract and that an employee has no vested interest in a bonus until its payment. Far from being hidden in a long employee manual, the provision is located on the second page of a two-page document under an unambiguous heading which itself disavows the existence of vested rights,” the court said.

Further, the court rejected the contention that Comdisco promised unconditionally to pay the employees incentive bonuses regardless of their status. “As noted by the bankruptcy judge, there is no direct evidence that Comdisco made such a promise,” the district court found.