Labor and Employment Law

Federal Appellate Court in New York Rules That Denying or Reducing Employee’s Discretionary Bonus May Be Unlawful Discrimination

 On October 19, 2015, in Davis v. New York City Department of Education, No. 14-1034-cv, 2015 U.S. App. LEXIS 18115 (2d Cir. Oct. 19, 2015), the U.S. Court of Appeals for the Second Circuit held that “the denial or reduction of a discretionary bonus . . . constitute[s] an adverse employment action,” and thus may serve as the basis for a claim of discrimination under the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq. (the “ADA”) [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. This decision by the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) is of particular relevance to discharged professionals in the investment banking or other financial services sectors.

The Second Circuit hears appeals from judgments and orders of the federal district courts sitting in the states of New York, Connecticut, and Vermont.

Although the Second Circuit’s Davis decision addresses the ADA, most federal statutes prohibiting discrimination or retaliation require, as an element of a cause of action under the statute, that the plaintiff employee suffer an adverse employment action. For example, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. §§ 2000e et seq. — which bars public employers and private employers with 15 or more employees from discriminating in all terms and conditions of employment on the basis of gender, race, national origin, color and religion — requires, as an element of a claim under that Act, that the plaintiff worker suffer an adverse employment action.

Therefore, it seems clear that, in future cases, the Second Circuit will determine that the denial or reduction of a discretionary bonus is an adverse employment action under most federal statutes barring discrimination or retaliation, and, consequently, that the denial or reduction of a discretionary bonus may serve as the basis for claims of discrimination or retaliation under most federal statutes prohibiting the same.

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.

In court actions or arbitration proceedings in which workers claim breaches of express and implied contracts to pay bonuses, employers often defend on the ground that the written contract of employment, the employment manual, the written bonus plan, or other employment-related documents contain language purporting to afford the employer “discretion,” “sole and exclusive discretion,” or the like in determining bonuses.

Thus, as stated above, the Second Circuit’s Davis decision is of particular relevance to terminated employees in the investment banking and financial services industries.

The Facts

In Davis, the plaintiff individual was employed by the defendant, the New York City Department of Education (the “City Department of Education” or the “NYC DOE”), as a junior high school teacher.

Under a collective bargaining agreement (the “CBA”) between the City Department of Education and the plaintiff’s labor union, the junior high school at which the plaintiff taught took part in a bonus program under which the school as a whole would receive, from the NYC DOE, a lump sum bonus award if students met certain achievement goals for the school year. The school’s total bonus pool was computed by multiplying, by $3,000, the number of full-time, union-represented staff members employed by the school.

As the CBA required, the junior high school formed a compensation committee, comprised of the school’s principal and other staff members. The compensation committee determined the methodology for distributing any award the school earned from the bonus program.

The CBA implied that all eligible staff should share in the bonus. However, the CBA gave the committee discretion as to whether to make equal individual awards, to vary the awards by job title, or to make differing awards.

In October 2008, the plaintiff was injured in a motor vehicle collision. As a result, she took an unpaid medical leave of absence for about four months.

The school received, from the City Department of Education, a lump sum bonus award for the 2008-2009 school year. A union representative informed the plaintiff that the plaintiff’s award would be divided between the plaintiff and the substitute teacher who taught the plaintiff’s classes during the plaintiff’s leave. Ultimately, the NYC DOE awarded the plaintiff a $1,000 bonus, and awarded the substitute teacher a $2,000 bonus. Teachers who worked at the junior high school for the entire academic year received bonuses of $3,000 each.

The plaintiff, proceeding pro se, filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission (the “EEOC”), alleging that the NYC DOE violated the ADA by discriminating against her on the basis of a disability (the injuries which necessitated the plaintiff’s unpaid medical leave) with regard to the employee bonuses. The EEOC issued a right to sue letter, and the plaintiff, again proceeding pro se, filed an ADA lawsuit in the U.S. District Court for the Eastern District of New York (the “Eastern District of New York” or the “District Court”).

The District Court had granted summary judgment for the NYC DOE. The Eastern District of New York had reasoned that the plaintiff had failed to make a prima facie case of disability discrimination, because the reduction of the plaintiff’s bonus from $3,000 to $1,000 did not constitute an adverse employment action under the ADA.

The Second Circuit’s Decision

In Davis, the Second Circuit held that the Eastern District of New York erred in ruling that, for purposes of a disability discrimination claim, denial or reduction of a discretionary bonus cannot constitute an adverse employment action. The Second Circuit explained that, as is required to qualify as an adverse employment action, the NYC DOE’s denial or reduction of the plaintiff’s discretionary bonus was ” ‘materially adverse’ with respect to ‘the terms and conditions of employment.'”

Further, explained the Davis Court, “The fact that the employer has discretion whether to grant bonuses or raises does not support the conclusion that an employer may freely allocate them on the basis of racial or religious bias, or disability discrimination.”

Despite the District Court’s error, the Second Circuit affirmed the lower court’s judgment dismissing the plaintiff’s ADA lawsuit. The Davis Court held that, even though the denial or reduction of the plaintiff’s discretionary bonus was an adverse employment action, the plaintiff failed to present evidence sufficient to show that disability discrimination played a role in the City Department of Education’s decision to divide, between the plaintiff and the substitute teacher, the $3,000 available as a bonus.

In holding that no genuine issue of material fact existed as to whether the NYC DOE’s decision to reduce the plaintiff’s bonus was motivated by disability discrimination, the Davis Court highlighted the following uncontested facts: the plaintiff was absent for four months; during the plaintiff’s absence she did not contribute to the school’s earning of bonuses for its teachers; the school needed to obtain a substitute teacher during the plaintiff’s lengthy absence; and the substitute teacher contributed significantly to the school’s earning of the bonus.

If you are a professional who suspects that your former employer is unlawfully refusing to pay you a bonus or incentive compensation owed to you and you live in the New York City area, call Attorney David S. Rich at (212) 209-3972.

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