Accrual of Employee Bonuses

      We have recently received numerous inquiries from clients that have amended, or are considering amending, their employee bonus plans to include a variety of contingencies and clawback provisions in their bonus plans. Much of this activity has been prompted by recent legislation, such as Dodd-Frank, and pressure from the business community to give employees a greater long-term stake in their companies’ profitability by making either the earning or the retention of their bonuses depend on employee behavior that may extend well beyond the time when the bonuses are paid to the employees.

      Some typical contingency clauses that we have seen include dishonesty clauses, requirements that employees remain employed beyond the time when the bonus is earned, non-compete clauses, restatement of company earnings clauses and violation of company policy clauses. Sometimes these contingency clauses convert into clawback provisions which require employees to refund bonuses that they have already been paid.

      Companies appear to be overlooking the fact that the inclusion of many of these types of provisions in an employee bonus plan may jeopardize the current deductibility of such bonuses for federal and state income tax purposes. However, there may be actions that can be taken to either avoid or ameliorate such deduction problems. Accordingly, if your bonus plans have these kinds of contingencies or clawbacks, or you are considering adding new ones, we would be glad to identify the potential problems and the possible alternatives to ameliorate those problems.