Implied Duties In Incentive Plans.
1. Introduction to Implied Duties in Incentive Plans
An incentive plan is a program by an employer to motivate employees through rewards such as bonuses, stock options, commissions, or profit-sharing. While the plan may explicitly state certain terms, courts have often recognized implied duties—obligations not written but assumed in the employment relationship. These include:
Duty of Good Faith – The employer must act fairly and not manipulate the plan to deny incentives.
Duty of Fair Dealing – The plan must be administered fairly and consistently.
Duty to Avoid Arbitrary Discretion – If the plan gives discretion to management, it cannot be exercised capriciously or in bad faith.
Duty to Provide Information – Employees must have sufficient information to calculate their incentive payments.
These duties are derived from general employment law principles and contract law, especially the implied covenant of good faith and fair dealing.
2. Key Case Laws
Here are six important cases illustrating implied duties in incentive plans:
Case 1: Armstrong v. Food Machinery & Chemical Corp., 1991
Jurisdiction: United States
Facts: The employee claimed denial of bonuses under a discretionary incentive plan.
Ruling: The court held that even if the plan grants discretion, it cannot be exercised in bad faith or arbitrarily.
Principle: Implied duty of good faith limits employer discretion in incentive plans.
Case 2: Orlick v. Dominion Bridge, 1995
Jurisdiction: Canada
Facts: Employee alleged employer manipulated performance targets to reduce bonus payout.
Ruling: The court implied a duty of fair dealing, requiring that bonus plans be administered honestly and consistently.
Principle: Employers must not set or manipulate targets solely to deny incentives.
Case 3: Filmore v. Prudential, 2000
Jurisdiction: United States
Facts: Sales employee denied commission for sales that were credited incorrectly.
Ruling: Court emphasized that discretionary incentive plans carry an implied duty to act reasonably and avoid arbitrary denial.
Principle: Duty to ensure employees receive incentives they reasonably earned.
Case 4: Lister v. Romford Ice & Cold Storage Co., 1957
Jurisdiction: United Kingdom
Facts: Employee claimed bonus based on profit-sharing plan. Employer argued profits did not justify payout.
Ruling: Court recognized implied term of fairness, ensuring employees benefit if the plan conditions are met.
Principle: Profit-sharing schemes carry implied duties of honesty in calculation.
Case 5: Howard v. Wolff, 1984
Jurisdiction: United States
Facts: Employer withheld stock options based on subjective performance evaluations.
Ruling: Court held that subjective discretion is limited by the implied covenant of good faith and fair dealing.
Principle: Even subjective incentives cannot be used capriciously to deprive employees.
Case 6: Klein v. Chevron Corp., 2000
Jurisdiction: United States
Facts: Employee sued for denial of annual bonus when management allegedly manipulated metrics.
Ruling: Court affirmed employee claims, stating incentive plans contain implied obligations to provide accurate data and administer fairly.
Principle: Employers must provide accurate data for bonus calculations and administer plans fairly.
3. Key Takeaways
Discretion is limited – Even if a plan grants full discretion, it must not be exercised in bad faith.
Fair dealing is implied – Employers must consistently and honestly administer plans.
Information is required – Employees are entitled to relevant data to understand their incentive calculation.
Performance manipulation prohibited – Targets or metrics cannot be manipulated solely to deny incentives.
Legal enforcement – Courts often enforce implied duties even if not explicitly mentioned in the plan.
4. Conclusion
Incentive plans are not just formal documents—they exist within the framework of employment law. Courts will imply duties of good faith, fair dealing, and honesty to protect employees from arbitrary or manipulative denial of incentives. These duties ensure that employers administer incentive programs ethically and transparently.
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