Bonus and severance programs: Key strategy to reduce employers’ legal risk
You and your Finance team may want to give your bonus and severance programs a second look. It’s important to make sure they’re aligned with federal standards, if possible.
Otherwise, you may have to deal with tricky state wage laws in any legal disputes. Many state laws are more favorable to employees. This makes it harder for employers to defend themselves in court.
Not only are these legal battles costly themselves – but a loss can be even more expensive. Employers can be subject to hefty fines and penalties if a court rules they violated state wage law.
A recent court case, Atkins v. CB&I LLC, shows how bonus and severance programs that don’t meet the standards of the Employee Retirement Income Security Act of 1974 (ERISA) can create big hassles for employers.
Not eligble under federal law
In Atkins, several employees sued their former employer. All were construction workers who quit before the project was finished. Under the terms of their contract, that meant they forfeited their bonuses.
The workers claimed this practice violated state law because it counted as an illegal wage forfeiture. However, the employer said ERISA governed the state program, and the federal law preempts state laws.
A district court agreed with the employer. But on appeal, the employees won their case. The program didn’t count as an ERISA plan because it involved a single payment that was easy to calculate with little work needed to determine if an employee was eligible. So, the stricter state law applied. Now, a state court will decide if the employer’s incentive program was compliant with the law.
Avoid issues with bonus and severance programs
To prevent similar hassles with your bonus and severance programs, make sure the terms are clearly spelled out in employees’ contracts.
It’s also vital to work closely with your company’s lawyer or legal department so you know how these programs align with relevant local, state and federal laws.
Free Training & Resources
Further Reading
The amounts you can exclude from an employee’s gross income for certain fringe benefits will increase for 2026, IRS announced. As you ...
How much might an employer have to pay when it fails to reinstate striking employees? NLRB Region 6 has approved a $3.66 million settlem...
The new Mississippi Work and Save Program creates a voluntary, state-run retirement savings option for private-sector employees whose emplo...
Beware of auto pilot when issuing expense reimbursement checks to employees. Some, or all, of the money may technically be wages instead. ...
A rule that hadn’t changed since 1954 may be getting an update. The IRS has proposed eliminating the 1099 filing requirement for paym...
The Financial Accounting Standards Board (FASB) is requiring public companies to disclose expense details involving employee compensation, ...