Terminating bonus plan four months before DOE regs would have prohibited program not breach of good faith, fair dealing

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By Joy Waltemath

By Ronald Miller, J.D.

An education employer’s decision to terminate a bonus plan that was based on securing student enrollment at its institution, four months before new Department of Education (DOE) regulations would prohibit that practice, did not constitute a breach of the implied covenant of good faith and fair dealing, ruled the Seventh Circuit. The appeals court determined that it was not objectively reasonable for the employee to expect that the employer would never terminate the plan, or would do so only by following a certain notice procedure not required by the plan, simply because it had failed to exercise the option in the past (Wilson v. Career Education Corp., December 22, 2016, Rovner, I.).

In October 2010, the DOE released regulations that would take effect July 2011 and that would prohibit institutions participating in Title IV student financial aid programs (including the employer) from providing bonuses based directly or indirectly on securing enrollment. However, the employer did not wait until July 2011 to cease the payment of bonuses. Its decision deprived the employee of bonuses that were in the pipeline at that time. He claimed the decision to terminate the bonus payments in February 2011 constituted a breach of the implied covenant of good faith and fair dealing.

Reasonable expectations of the parties. In a prior ruling by the Seventh Circuit, Wilson I, the court had held that the employee could succeed in his claim if he could prove that the employer exercised its discretion in a manner contrary to the reasonable expectations of the parties. On remand, the employee argued that cost savings, not the desire to comply with the regulations, was the primary driver in the employer’s decision to terminate the Plan in February 2011. But the district court rejected that argument, holding that there was no evidence that the employer retained for itself $5 million in bonus payments that were due to admissions representatives.

The appeals court recognized in Wilson I that an opportunistic decision to terminate bonuses would not comport with the reasonable expectations of the parties. Thus, if the employer used the excuse of the impending regulations to prematurely terminate the bonuses in a “money grab” unrelated to any legitimate business expectations, that arbitrary termination of bonuses would violate the objectively reasonable expectations of the parties. Here, the employee argued that the employer’s decision to terminate the plan was made in violation of the covenant of good faith and fair dealing in that it was inconsistent with his reasonable expectation that it would not terminate the plan early and that the employer acted with improper motivation.

Past practices. In this instance, the employee relied on evidence that the employer had historically paid for all plan compensation; it had never made substantive plan changes during the period of performance; it promoted the plan in late 2010 as if it was going to continue paying through 2011; and he was surprised that the plan was ending early. However, the court determined that a reasonable expectation that the plan will be continued could not arise solely from the employer’s failure to exercise that option earlier or its failure to provide six months’ notice of the termination. Under the plain language of the contract, the employee could not have reasonably expected that the employer would only terminate the bonuses for good cause because the express terms of the plan precluded such an expectation.

The employee pointed to no evidence that the employer explicitly disavowed any intent to exercise its rights under the plan in the future, and in fact the evidence established that he expected that the bonuses would be terminated but had hoped it would happen at a later date. On November 2, 2010, the employer’s CEO informed all employees that the plan would need to change in order to comply with the DOE rules issued on October 29, 2010. The decision to terminate bonuses as of February 2011 was not made until early December 2010, and was immediately communicated to the admissions representatives.

Bad faith. Next, the employee argued that the district court failed to credit evidence that the actual reason for the employer’s action was because of its deteriorating financial condition rather than the regulation. According to the employee, the employer altered its salary structure in response to its deteriorating economic condition, and not because of the impending regulation. The court pointed out that the mere presence of a reason other than the regulation did not itself render the employer’s actions in bad faith. Here, the record supported a finding that no money was saved by changes in the salary structure in that employees received higher base salaries plus salary increases that correlated with 75 percent of their bonus average for the past two years.

The fact that the employer may have acted to cut expenses in response to an economic crisis was precisely the type of reason that employees would reasonably expect would result in an alteration of salary. The covenant of good faith and fair dealing required only that discretion be exercised reasonably with proper motive rather than arbitrarily or capriciously or in a manner inconsistent with reasonable expectations. Here, the contract reserved the right to terminate the plan and retain unearned bonuses at any time, and it would be objectively unreasonable for the employee to believe that such discretion would not be exercised where a changing business climate significantly worsened the financial condition of the company. Accordingly, the evidence was insufficient to allow a jury to reasonably conclude that the employer breached the implied covenant of good faith and fair dealing.

Source:: Employment Law Daily Newsfeed

      

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