Terminated Employees in the Investment Banking and Financial Services Industries May Be Entitled to Recover Their Unpaid Bonuses

By David S. Rich and Barry R. Lax*

From September 2007 to June 2008, New York City's financial services sector shed approximately 9,200 jobs.[i] Industry analysts forecast that thousands more jobs may disappear after the recent meltdowns at Lehman Brothers and Merrill Lynch.[ii] In light of this corporate bloodletting, workers should know that, under New York law, a terminated employee may pursue, among other claims, causes of action for breach of express and implied contract,quantum meruit, and violation of Article 6 of the New York Labor Law[iii] against his or her employer for failing to compensate the employee for bonuses owed to him or her, even where no agreement to pay bonuses is set forth in writing. Such unpaid bonuses may be particularly large for highly paid professionals on Wall Street, who customarily are paid a significant percentage of their annual compensation after the end of the year in which the professionals' investment banking services or other financial services were rendered.

Highly paid professionals on Wall Street typically are paid a significant percentage of their annual compensation after the end of the year in which their services were rendered.[iv] When an employee resigns or is terminated before the end of the employer's fiscal or calendar year, or before the time bonuses are actually paid (which may be as late as four months into the following year),[v] employers frequently refuse to pay a bonus. Employees contend that the bonus was their right under a contract of employment. Employers argue that no employment contract existed, or maintain that they retained unfettered discretion to determine a bonus amount, which could be nothing.[vi] However, in New York, there are several common law and statutory grounds on which, based on the facts and circumstances, a terminated employee may be entitled to recover his or her unpaid bonuses, either proportionately or in full.[vii]

"Employees in this State [of New York] may enforce an [oral] agreement to pay an annual bonus made at the onset of the employment relationship where such bonus constitutes 'an integral part of plaintiff's compensation package.'"[viii]

For example, in Mirchel v. RJM Securities Corp.,[ix] the employer allegedly orally promised a government securities broker that he would receive an annual bonus that would be "'substantial'" in proportion to his base salary.[x] The Appellate Division, First Departmentreversed the Supreme Court's order granting summary judgment dismissing the broker's complaint seeking an unpaid, yearly bonus.[xi]

"That the exact amount of the promised bonus payments was not specified is not fatal to [a] plaintiff's claim. Under New York law, if there exists a reasonable basis for calculating the bonus due an employee, a court may enforce the contract term."[xii] "Bonus history thus may be used to determine an appropriate bonus amount."[xiii]

Further, the terms of an oral agreement to pay an annual bonus to an employee in the financial services industry or elsewhere who is a "commission salesperson," but who has no written employment agreement, presumptively are what that employee says those terms are. This is the case because, effective October 16, 2007, N.Y. Labor Law

§ 191(1)(c) requires that employment contracts for "[c]ommission salespersons" be in writing and signed by both the employer and the commission salesperson. "Commission salesperson" appears to include many highly paid professionals on Wall Street, such as securities brokers.

Specifically, the term "commission salesperson" or "commission salesman" encompasses "any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based in whole or in part on commissions"[xiv] - that is, any such employee whose earnings are based wholly or partially on "compensation accruing to [him or her] for payment by a principal, the rate of which is expressed as a percentage of the dollar amount of wholesale orders or sales."[xv] (However, the term "commission salesperson" excludes any employee "whose principal activity is of a supervisory, managerial, executive, or administrative capacity.")[xvi] As a penalty, N.Y. Labor Law § 191(1)(c) creates a presumption that if the terms of employment are not reduced to writing, the terms that the commission salesperson presents are the agreed-upon terms of employment. Thus, as stated, the terms of an oral agreement to pay an annual bonus to an employee in the financial services industry or elsewhere who is a commission salesperson, but who has no written agreement of employment, presumptively are what that employee represents that those terms are.

Apart from oral contracts, "an implied contractual relationship may be established by conduct of the parties."[xvii] Thus, New York State appellate and trial courts, the Second Circuit, and federal district courts sitting in New York have determined, in numerous lawsuits by professionals in the financial industry or in other fields, that "The course of dealing between the parties evinces an implied promise that annual or semi-annual bonus payments constitute a part of plaintiff's compensation."[xviii]

For example, in the Mirchel case, the Appellate Division, First Department, held that a triable issue of fact, precluding summary judgment for the employer on a government securities broker's implied contract claim seeking an unpaid, yearly bonus, existed where "throughout the term of his employment, plaintiff's compensation included a substantial[, annual] bonus."[xix]

Moreover, "That the amount of each annual bonus was determined at the end of the year does not bar recovery under an implied contract."[xx] "Nor can a bonus be withheld because . . . the employee did not work until the date the bonus was to have been paid."[xxi]

As an alternative to recovering a bonus for the year of the employee's termination under the express and implied contracts between the employer and the employee, an employee may be entitled to recover such a bonus from the employer in quantum meruit. This may be the case where the professional's salary alone is insufficient to constitute reasonable value for the investment banking services or other financial services he performed in his job for the employer.[xxii]

N.Y. Labor Law § 193 states, with exceptions not here pertinent, that "No employer shall make any deduction from the wages of an employee . . . ."[xxiii] Article 6 of the N.Y. Labor Law defines "'Wages,'" in pertinent part, as "the earnings of an employee for labor or services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis."[xxiv] In turn, Article 6 of the Labor Law defines an "'Employee'" as "any person employed for hire by an employer in any employment."[xxv] An executive is an "employee" within the meaning of N.Y. Labor Law §§ 190(2) and 193(1).[xxvi] Bonuses or incentive compensation are "wages" within the meaning of §§ 190(1) and 193(1), and "[are] a contractual right of the employee," where "[the] compensation scheme is predicated upon an employee's personal productivity and the objective success of the venture - not the employer's discretion or any subjective standard . . . ."[xxvii]

For example, in the Fiorenti case,[xxviii] the employment contracts of two physician employees stated that "'[a] bonus amount in addition to the guaranteed hourly rate will be determined [and] [t]he bonus shall be paid'" based upon a set formula.[xxix] The formula for the amount of the bonus "t[ook] . . . into account the employee's personal productivity."[xxx] As a result, the Supreme Court, Nassau County, denied the motion of the employer and the sole member of the employer's board of directors to dismiss, for failure to state a cause of action, physician employees' claim that the employer, in violation of Article 6 of the N.Y. Labor Law, wrongfully withheld wages from the employees in not paying bonuses due for 1996, 1997, and 1998.[xxxi] The Fiorenti Court observed: "The standard to be applied for entitlement to a bonus is objective and not subject to [the employer's] discretion or whim."[xxxii]

Where an employer's bonuses or incentive compensation are "wages" under Article 6 of the Labor Law, the employer violates N.Y. Labor Law § 193(1) by withholding from a terminated employee his unpaid bonuses.[xxxiii] If an employee prevails on such a wage claim, the employer is liable to the employee for the unpaid bonuses, for reasonable attorneys' fees, and, if the court finds the employer's failure to pay wages to be willful, for liquidated damages equal to 25 percent of the total amount of wages found to be due.[xxxiv]

In sum, in New York, there are a number of common law and statutory grounds - including breach of express and implied contract, unjust enrichment, and violation of Article 6 of the New York Labor Law -- on which, based on the facts presented, a terminated employee may be entitled to recover his or her unpaid bonuses, either proportionately or in full. Discharged professionals in the investment banking or other financial services sectors, who suspect that their former employers are unlawfully failing to compensate them for monies owed to them, should analyze their options with experienced counsel.

[1] Alex Williams, Cast in 'Survivor,' the Wall Street Edition, N.Y. Times, Sept. 21, 2008, at ST1.

2 Alex Williams, Cast in 'Survivor,' the Wall Street Edition, N.Y. Times, Sept. 21, 2008, at ST1.

3 N.Y. Labor Law §§ 190-199-a.

4 See Howard S. Meyers, Recovering Unpaid Bonus Payments in Turbulent Times, N.Y. L.J., June 27, 2008, at 4 ("[B]onuses on Wall Street are an expected part of a senior employee's total compensation and are often viewed as essential to maintaining a securities firm's franchise and employees. The fact that this compensation obligation is usually paid at year-end, or within the first quarter of the following year, does not diminish its level of importance"); Matisoff v. Dobi, N.Y. L.J., March 17, 1995, at 26 (Sup. Ct. N.Y. County March 17, 1995) ("The court is well aware that the bonus structure of [stock market research] analysts i[s][] related to their results and is expected to be a substantial portion of their total earnings"), rev'd on other grounds, 228 A.D.2d 200, 644 N.Y.S.2d 13 (1st Dep't 1996), rev'd on other grounds, 90 N.Y.2d 127, 681 N.E.2d 376, 659 N.Y.S.2d 209 (N.Y. 1997).

5 David B. Wechsler & Leonard Pack, Do Terminated Employees Forfeit Their Right to a Bonus?, N.Y.L.J., Mar. 16, 1993, at 1.

6 Robert P. Haney, Jr. & Cynthia Soohoo, Why Employees Win Bonus Claims: Pay Plans Can Create Contract Rights, N.Y. L.J., Sept. 21, 1998, at S4.

7 Wechsler & Pack, supra note 5, at 1.

8 Mirchel v. RJM Securities Corp., 205 A.D.2d 388, 389, 613 N.Y.S.2d 876, 878 (1st Dep't 1994) (quoting Harden v. Warner Amex Cable Communications Inc., 642 F. Supp. 1080, 1096 (S.D.N.Y. 1986)); accord Canet v. Travelstead, 917 F. Supp. 969, 985 (E.D.N.Y. 1996) (after bench trial, awarding former employee of real estate developer a bonus of $300,000 for 1988 which the developer orally had promised him); see also Rackson v. Sosin, 2001 WL 266981, 14 Fed. Appx. 23, 25 (2d Cir. Mar. 16, 2001) (in 1993, after joint venture ended, defendant joint venturer failed to allocate to one of its senior executive vice presidents, as a bonus, a percentage of the profits which the joint venture earned in that year; affirming district court's judgment entered upon jury verdict in the vice president's favor; "the evidence was sufficient to find an express or an implied [oral] contract" to allocate to the vice president such bonus);Gruber v. J.W.E. Silk, 52 A.D.3d 339, 859 N.Y.S.2d 650, 650-651 (1st Dep't June 12, 2008) (plaintiff employee alleged that defendant employer orally promised to pay her a bonus of $75,000 per year, payable sporadically over the course of the year; affirming Supreme Court's order denying defendant's motion for summary judgment dismissing the amended complaint); Allan S. Bloom & Richard B. Palmer Jr., Neither Rain, Nor Snow, Nor Sleet, Nor Bonus, N.Y. L.J., Jan. 4, 2006, at 4 ("Employers, beware: an oral promise to pay a bonus may be enforceable, so long as it complies with the Statute of Frauds, does not conflict with a written policy or an integration clause in an offer letter or an employment agreement, and otherwise passes muster under traditional contract principles - offer, acceptance, mutual assent, and consideration"); Haney & Soohoo, Why Employees Win Bonus Claims: Pay Plans Can Create Contract Rights,supra note 6, at S4 ("Courts have held that oral employment agreements to make bonus payments are enforceable.").

9 205 A.D.2d 388, 389, 613 N.Y.S.2d 876, 878 (1st Dep't 1994).

10 Mirchel, 205 A.D.2d at 388, 613 N.Y.S.2d at 877.

11 Id. at 388-390, 613 N.Y.S.2d at 877-878.

12 Giuntoli v. Garvin Guybutler Corp., 726 F. Supp. 494, 508 (S.D.N.Y. 1989); accord Canet, 917 F. Supp. at 985; Wechsler & Pack, supra note 5, at 1; Haney & Soohoo, supra note 6, at S4.

13 Giuntoli, 726 F. Supp. at 508; accord Howard S. Meyers, supra note 4, at 4; Wechsler & Pack, supra note 5, at 1.

14 N.Y. Labor Law § 190(6).

15 N.Y. Labor Law § 191-a(a).

16 N.Y. Labor Law § 190(6).

17 Mirchel v. RJM Securities Corp., 205 A.D.2d 388, 390, 613 N.Y.S.2d 876, 878 (1st Dep't 1994).

18 Mirchel, 205 A.D.2d at 390, 613 N.Y.S.2d at 879; accord Halikias v. Warburg Dillon Read LLC, 195 Misc.2d 447, 447-450, 759 N.Y.S.2d 288, 289-291 (Sup. Ct. N.Y. County 2000) (in the years of 1995, 1996, 1997, broker-dealer paid the petitioner individual -- who "had held various high-level positions with" the broker-dealer -- bonuses of $1,275,000, $1,650,000, and $600,000, respectively, whereas in 1998, the final year of the petitioner's employment, broker-dealer paid no bonus to the petitioner; confirming, and denying broker-dealer's cross-motion to vacate, arbitration award to the petitioner of $1,442,406 in additional bonus compensation for 1997-1998); see, e.g., Credit Suisse First Boston Corp. v. Crissanti, 289 A.D.2d 83, 83, 734 N.Y.S.2d 150, 151 (1st Dep't 2001) (affirming Supreme Court's order denying employer's petition to vacate arbitration award granting a terminated arbitrageur a $2,339,532 bonus; "we find no basis for judicial disturbance of the arbitrators' primarily factual conclusion that the bonus sought by respondent was an essential component of his compensation and that the parties' course of dealing and the industry practice gave rise to an implied right to a bonus"),affirming denial of petition to vacate NYSE Arbitration No. 1999-007828 (June 16, 2000);Rackson v. Sosin, 2001 WL 266981, 14 Fed. Appx. 23, 24 (2d Cir. Mar. 16, 2001) ("the parties['] course of dealing over many years is sufficient to establish a basis for finding an implied contract" under which defendant joint venturer was required to allocate to one of its senior executive vice presidents, as an annual bonus, a percentage of the profits which the joint venture earned in that year); Giuntoli v. Garvin Guybutler Corp., 726 F. Supp. 494, 507-508 (S.D.N.Y. 1989) ("the course of dealing between the parties evidences an implied promise that semi-annual bonus payments constituted a term of [the] plaintiff [money market broker]'s employment. Thus, plaintiff has adequately pleaded a contract claim with respect to bonus compensation"); Squadrito v. Credito Italiano, 193 Misc. 34, 35, 83 N.Y.S.2d 334, 335 (N.Y. City Ct. N.Y. County) (granting summary judgment for plaintiff employee in his action against foreign corporation for bonus for the second half of 1941; "It is plain that this was done in accordance with the custom of many years standing, and that the plaintiff and his assignors had long relied upon these semi-annual bonus payments as constituting part of their compensation"); Bloom & Palmer, supra note 8, at 4 ("New York has long recognized a cause of action for bonuses based on a course of dealing between employer and employee").

In Halikias v. Warburg Dillon Read LLC, supra, the Court slightly misstates - as $1,422,000 -- the amount of the arbitration award at issue. Halikias, 195 Misc.2d at 447, 759 N.Y.S.2d at 289. The arbitration award itself sets forth the $1,442,406 figure. Halikias v. Warburg Dillon Read LLC, NYSE Arbitration No. 1998-007299 (Dec. 10, 1999).

19 Mirchel, 205 A.D.2d at 388, 613 N.Y.S.2d at 877.

20 Id. at 390, 613 N.Y.S.2d at 879.

21 Id.

22 See, e.g., Mirchel v. RJM Securities Corp., 205 A.D.2d 388, 390-391, 613 N.Y.S.2d 876, 879 (1st Dep't 1994) (reversing Supreme Court's order granting summary judgment dismissing former government securities broker's complaint against employer asserting, among other claims, a quantum meruit cause of action for an unpaid, yearly bonus).

23 N.Y. Labor Law § 193(1).

24 N.Y. Labor Law § 190(1).

25 N.Y. Labor Law § 190(2).

26 See Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609, 614-616, 891 N.E.2d 279, 861 N.Y.S.2d 246, 248-250 (N.Y. June 10, 2008).

27 Fiorenti v. Central Emergency Physicians, P.L.L.C., 187 Misc.2d 805, 807-809, 723 N.Y.S.2d 851, 854-855 (N.Y. Sup. Ct. Nassau County 2001).

28 187 Misc.2d 805, 807-809, 723 N.Y.S.2d 851 (N.Y. Sup. Ct. Nassau County 2001).

29 Fiorenti, 187 Misc.2d at 808-809, 723 N.Y.S.2d at 855.

30 Id. at 809, 723 N.Y.S.2d at 855.

31 Id. at 807-811, 723 N.Y.S.2d at 854-856.

32 Id. at 809, 723 N.Y.S.2d at 855.

33 See Fiorenti, 187 Misc.2d at 807-809, 723 N.Y.S.2d at 854-855.

34 See N.Y. Labor Law § 198(1-a), 198(c).

David S. Rich < drich@davidrichlaw.com > is the founding member of the Law Offices of David S. Rich, LLC in New York City and Englewood Cliffs, New Jersey. Mr. Rich litigates commercial, employment, and securities matters in federal and state courts, and arbitrates such matters before FINRA and other arbitral bodies.

Barry R. Lax < blax@laxneville.com > is a partner of the law firm of Lax & Neville, LLP in New York City. Mr. Lax litigates commercial, employment, and securities matters in federal and state courts, and arbitrates such matters before FINRA and other arbitral bodies.