The Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq., (“FMLA”) requires employers to walk a fine line when calculating bonus payments:  while employers may not discourage the use of FMLA leave by reducing or eliminating a bonus the employee would otherwise be eligible to receive, employers may calculate bonus awards based on an employee’s production.  In a case of first impression, the United States Court of Appeals for the Third Circuit recently examined this crucial distinction and provided some guidance to employers on structuring bonus programs without running afoul of FMLA requirements.  See Sommer v. The Vanguard Group, 461 F.3d 397 (3d Cir. 2006).  The bottom line is that employers can reduce production bonuses based on the amount of lost production caused by FMLA leave but cannot reduce “absence of occurrence” bonuses (such as safety bonuses and perfect attendance bonuses) based on an employee’s use of FMLA leave.

FMLA Framework

The FMLA states that it is “unlawful for any employer to interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided” in the FMLA.  29 U.S.C. § 2615(a)(1).  In defining what actions it believes “interfere” with an employee’s right to assert protections under the FMLA, the United States Department of Labor (“DOL”) has stated that interference includes “not only refusing to authorize FMLA leave, but discouraging an employee from using such leave.”  29 C.F.R. § 825.220(b).  The DOL has offered more specific guidance  when it comes to company bonuses, especially the distinction between bonuses that are awarded for an “absence of occurrence” and bonuses that are awarded based on production.

Many employers pay bonuses in different forms to employees for job-related performance such as for perfect attendance, safety (absence of injuries or accidents on the job) and exceeding production goals.  Bonuses for perfect attendance and safety do not require performance by the employee but rather contemplate the absence of occurrences.  To the extent an employee who takes FMLA leave had met all the requirements for either or both of these bonuses before FMLA leave began, the employee is entitled to continue this entitlement upon return from FMLA leave, that is, the employee may not be disqualified for the bonus(es) for the taking of FMLA leave. . . .  A monthly production bonus, on the other hand does require performance by the employee.  If the employee is on FMLA leave during any part of the period for which the bonus is computed, the employee is entitled to the same consideration for the bonus as other employees on paid or unpaid leave (as appropriate).

29 C.F.R. § 825.215(c)(2).  The DOL has also issued opinion letters stating that where a bonus is calculated based on hours worked or earnings, an individual who has taken FMLA leave would naturally receive a lesser amount than the employee who did not take FMLA leave.  See, e.g., DOL Opinion Letter, FMLA-110, 2000 WL 33157364 (Sept. 11, 2000).

Sommer v. The Vanguard Group

In Sommer v. The Vanguard Group, 461 F.3d 397 (3d Cir. 2006), the Third Circuit recently examined whether an employer interfered with an employee’s FMLA rights when, upon his return from FMLA leave, the employer did not award him a full annual bonus payment but instead awarded him a prorated bonus.  The Vanguard Partnership Plan (the “Plan”) awarded bonuses to employees based on three criteria:  job level, length of service with the company, and hours worked.  Hours worked was defined by the Plan as the “actual hours for which an employee is paid or entitled to be paid by the Company for the performance of duties or for a vacation, holidays, sick time, or an approved leave of absence.”  Under the Plan, however, employees who are on disability leaves of absence are not credited with hours of service.  If an employee fails to meet the annual goal of 1950 hours worked, the employee’s Plan payment is prorated based on the number of hours actually worked divided by 1950.  The Plan specifically notes “the Partnership Payment is always prorated for the leave time no matter how short the amount of time the [employee] is on leave, from a few hours to a few months.” 

The plaintiff, Robert Sommer, took two FMLA leaves of absence in 2001 and had his Partnership Plan bonus reduced by more than $1,700.  The Third Circuit, while noting it is “difficult to sift through the jargon laden terms of a company’s bonus plan documents to ascertain the goal actually being rewarded,” believed the Plan was “more akin to a bonus program that rewards employee production.”  In doing so, the court rejected the plaintiff’s argument that the bonus really rewarded the individual for not taking time off.  Because bonus programs based on production comport with FMLA requirements, the Third Circuit held that the Partnership Plan did not interfere with Sommer’s FMLA rights.

Practical Implications

While Sommer is only binding precedent in the Third Circuit (Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands), this case provides practical guidance to all employers subject to FMLA requirements that offer employee bonuses.  As an initial matter, employers subject to FMLA requirements should exercise caution when implementing bonus programs and should review those programs to ensure compliance with recent interpretations of FMLA requirements.  If a bonus program awards “absence of occurrence” bonuses, then the employer cannot reduce or eliminate the bonus based on an employee’s taking of FMLA leave.  If a bonus program is based on production, however, an employer is free to reduce a bonus if an employee’s use of FMLA leave resulted in lost production.  At least in the Third Circuit, a production bonus based on the total number of hours worked can be prorated when an employee takes FMLA leave and, as a result, does not meet an hours worked production goal.

Our Labor and Employment Group has significant experience in handling FMLA matters.  For more information, contact Eric E. Kinder at 304-340-3893.