Unpaid wages, bonuses, and commissions are common problems at the end of an employment relationship. Employees frequently retain lawyers to sue for unpaid compensation in the form of bonuses, wages, commissions, overtime or under employment contracts.
A recent Illinois case addresses the use of language by employers to avoid payment of compensation. In McClerly v. Wells Fargo, the Illinois Appellate Court considered a case where an employee sued to collect an earned bonus he expected to receive after his job was eliminated. Wells Fargo moved to dismiss on the basis that it had full discretion to deny a bonus to an employee under the applicable handbook. The court found that full discretion does not really mean what it says.
Although the employer retained absolute discretion under the contract, the Illinois Appellate Court found that such discretion must be exercised in good faith. It explained that “Every contract contains an implied covenant of good faith and fair dealing. …The purpose of this duty is to ensure that parties do not take advantage of each other in a way that could not have been contemplated at the time …the contract was drafted or do anything that will destroy the other party’s right to receive the benefit of the contract… Disputes involving the exercise of good faith arise when one party is given broad discretion in performing its obligations under the contract….In order to plead a breach of the covenant of good faith and fair dealing, a plaintiff must plead existence of contractual discretion….Where a contract specifically vests one of the parties with broad discretion in performing a term of the contract, the covenant of good faith and fair dealing requires that the discretion be exercised reasonably and with proper motive, not arbitrarily, capriciously, or in a manner inconsistent with the reasonable expectations of the parties.”
The court went on to explain that: “An employer that exercised its contractual discretion in a manner inconsistent with the reasonable expectations of the parties to deprive an employee of reasonably anticipated benefits may have acted in bad faith.”
This is an important ruling in wage disputes for unpaid bonuses where an employer had broad discretion in determining the award.