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As the economy continues to struggle, and businesses shutter, more employers may start offering employees retention bonuses to keep a skeleton staff on board through a company's final days.
So what employer obligations attach to a retention bonus?
The Sixth Circuit Court of Appeals ruled this week that an employer that offers a retention bonus subject to a condition precedent may not have an affirmative duty to take actions to trigger the condition precedent.
That doesn't mean that employers can offer retention bonuses in bad faith, and weasel out of payment later; the terms of the retention bonus offer will determine whether or not an affirmative duty exists.
In the case, Warner v. DSM Pharma Chemicals North America, Michigan-based DSM made a decision in 2005 to close a South Haven manufacturing facility. At the time, DSM planned to clean and demolish the site because there was no opportunity to sell the facility to another operator. DSM offered retention bonuses to 15 employees to stay through the shut-down phase.
In 2006, there was a change of plans. Albemarle Company purchased the facility, and agreed to offer employment to at least 92 percent of the active employees effective on the closing date. Eight of the employees who received retention bonus offers were offered Albermarle jobs.
DSM paid each employee who had accepted the original retention offer a pro-rated retention bonus, according to the amount of time the employee stayed with DSM prior to the Albermarle transition. DSM claimed it wasn't on the hook for the entire retention bonus because the facility never shut down, which was the condition precedent described in the retention bonus offer.
The eight employees sued DSM for breach of contract, arguing the DSM was liable for the full retention bonus. The plaintiffs lost at trial, and appealed on the grounds that the district court failed to give a jury instruction on Michigan law concerning conditions precedent.
In an unpublished opinion, the Sixth Circuit Court of Appeals affirmed the district court's ruling, finding that condition precedent case law was irrelevant in the case. Relying on the circuit's earlier Chase v. Matsu Manufacturing decision, the court noted that the retention bonus offer letter did not require DSM to shut down the facility, thus DSM did not have an affirmative duty to ensure that the condition precedent would trigger the retention bonus.
While this isn't a binding opinion from the Sixth Circuit Court of Appeals, you can employ this decision, and the court's Chase opinion, when drafting retention bonus agreements for your clients.