“Employer’s Sole Discretion” Provisions – Six Points to Consider

“Everyone is entitled to their own opinion.  No one is entitled to their own facts.”    

– Author Unknown

ACTUAL CASE HISTORY*: Brandon was a Business Development Officer for a large Midwestern company in the music publishing rights business. His job was to seek smaller music publishing rights companies who had over the years acquired a “catalogue” of music publication rights as possible acquisitions, and then to structure and close the deal. His assigned territory included several Midwestern cities, among them Detroit, Nashville and St. Louis. Most of the companies his employer sought to acquire were family-owned, and in recent years struggling to survive in a more consolidated, competitive and complex world of music publishing.

Brandon’s two previous employers were just that kind of company: family-owned and increasingly shut out of the international music rights publication business. He knew that tier of the industry quite well, and he was well-respected and highly regarded by many of the families who owned these companies. In fact, his first employer in this industry was a music rights publishing firm established by his uncle and two partners, and run in large part by his cousins.

To take this job, Brandon took a salary cut of $20,000, but was willing to do so because in his new job he was also eligible for a sizable bonus payment for each acquisition deal he brought to the company that was completed during the year. The details of bonus eligibility were set out in a company Bonus Plan that Brandon’s attorney reviewed for him prior to his taking the job.

The company Bonus Plan provided that Brandon was eligible for a bonus of $25,000 for each acquisition target in his business territory acquired during the calendar year. On this basis, Brandon felt confident he would achieve an overall increase in compensation. The company Bonus Plan provided that any issues as to eligibility, entitlement or calculation of bonuses would be “determined with finality by the Company Compensation Committee in its sole and absolute discretion.”

Brandon and his attorney discussed that last phrase, and both decided that it was not a problem, as similar language exists in many – perhaps even most – employment agreements, bonus plans, benefit plans and equity plans. It was something they both knew the company would not alter for Brandon, as it applied to all 12 of the Company’s Business Development Officers, and others, as well. 

Brandon’s first year was quite a success: he approached five acquisition targets, and closed four of the acquisition deals. When the following March 15th came around, it was time to distribute  bonus payments. When Brandon got his check, he was sorely disappointed: he was credited with just one of the four deals he closed. When he asked Accounting for an explanation, he was referred to Human Resources (“HR”) for a response. Their response was unsettling:

As to the first deal Brandon had closed, HR explained that, while the deal had fully closed, the acquired company’s offices were located in a suburb of Detroit, and technically not within the city limits. This, they claimed, made it outside of Brandon’s assigned territory, and thus ineligible for bonus purposes. This seemed to Brandon to be a reading of the Bonus Plan wording so hyper-technical as to be in bad faith.

As to the second deal Brandon had closed, HR replied that, while it had been finalized in the calendar year, not every document had been signed before December 31st. Instead a few documents, including transfer of warranties on the acquired company’s photocopiers, arrived in the mail during the first week of January, and thus made the deal inapplicable for bonus purposes. In fact, after the deal had closed in November, all monies had been paid to the owners of the acquired firm, and his company had taken control of the acquired firm. It sure seemed like a “done deal” to Brandon. When he asked HR if he would be credited with the acquisition bonus the following year, HR replied that it could not be certain. This, in particular, seemed almost deceptive, if not fraudulent, to Brandon.

As to the third deal Brandon had closed, HR replied that this third acquisition had been within Brandon’s territory, and had, indeed, been finalized within the calendar year, but that some concerns had arisen regarding two of the acquired firm’s 92 musical publishing rights. Thus, HR claimed, it was possible that some day a lawsuit might ensue, and that because such a lawsuit was possible, the Company was not considering this a “closed deal.” On this basis, Brandon’s attorney thought, no deal could ever be considered truly “closed.” It seemed irrational, at best.

Brandon’s attorney helped him appeal these decisions to the Company Compensation Committee. They received this 11-word response within 24 hours: “The Company’s determination is in its sole, absolute and unreviewable discretion.”

To Brandon’s disappointment, his attorney then advised him that, with those words in his Bonus Plan, there was little he could do to overturn it in court.   

LESSON TO LEARN: A careful reading of employment contracts, compensation plans and employee handbooks of many companies will likely find the phrase “employer’s sole discretion,” or variations thereof, in one or more contexts. Is it possible that one party to the employment relation can be solely and absolutely in charge of determining the outcome of issues between them? Is there anything that can be done if the “sole discretion” seems grossly unfair, or even illegal? Are there not any limits?

Lawyers who represent employees who face these situations will often counsel their clients that “In light of that phrase – ‘employer’s sole discretion’ – there is nothing I can do.” They are wrong. While the battle may be a bit “up hill,” there are several solid arguments an aggrieved employee can take to overcome that phrase. 

For example, ask yourself – or your attorney – “If the Employee Handbook says that the company has ‘sole and absolute discretion’ to change its employment policies, can it institute a new employment policy that permits physical abuse by managers, or even slavery?” Of course, the company’s “sole and absolute discretion” does not go that far, but why not?  Because all discretion has its limits.

As for a second example, ask yourself – or your attorney – “Can the Human Resources department claim that you missed a November 30th deadline to sign up for health insurance because you submitted your application on October 22nd?, and that October 22nd comes after November 22nd?” Of course, the company’s “sole and absolute discretion” does not go that far, but why not? Because all discretion has its limits.  

As for a third example, ask yourself – or your attorney – “If the Compensation Plan says that the company has ‘sole and absolute discretion’ to change its compensation policies, can it institute a policy that denies all employees overtime, even if the federal law says that for certain of the employees overtime is legally required?” Of course, the company’s “sole and absolute discretion” does not go that far, but why not? Because all discretion has its limits.

These are but a few of the unlimited examples we could offer that aptly illustrate that employers’ “sole and absolute discretion” has limits, and can be overcome. It’s important that, if you face this phrase, you do not feel powerless or without any remedy. There are several things you can do, even if your attorney doesn’t think so.  

Rather, you should have faith that in most circumstances, the law provides a remedy for unfairness. And, when there is hope, there is possibility; where there is good faith and perseverance, there is usually success. While overcoming the phrase “employer’s sole discretion” may not be easy, and may not be possible in some situations, there do exist ways and arguments to use to, at a minimum, stand up for yourself and for what is plainly right.

The bottom line is this: despite the location of words like “sole,” “absolute,” “unlimited” or “unreviewable” before the phrase “employer discretion,” there are limits on discretion, and no one should convince you to believe otherwise, or intimidate you from taking all available steps and advancing all good faith arguments available to you to stand up for yourself at work.

WHAT YOU CAN DO: Consider these six strong arguments you can use to defeat “employer’s sole and absolute discretion.”  

1. No employer has  “sole and absolute discretion” to violate the law. – No matter what an employment contract, employee handbook or employment bonus, benefit or equity plan says, no employer is free to violate the law. All aspects of the employment relation must comply with the law, including those related to non-payment of wages, harassment, discrimination, retaliation, taxes, fraud and otherwise.

Supervisors, senior management, Human Resources representatives, officers, Boards of Directors and other employer personnel can, and should be reminded of this fact, with respect, but without hesitation. This is perhaps the easiest kind of “sole and absolute employer discretion” issue to resolve.

2. No employer has “sole and absolute discretion” to ignore or change incontrovertible facts. – Friday comes after Thursday. Two plus two equals four. The sun is not a planet. Despite “sole, absolute, or unreviewable discretion,” no employer can decide otherwise. Quite often a careful review and analysis of employment relation disputes will reveal that such simple factual issues lie at the heart of the problem.

In pushing back against claims of “sole employer discretion,” always seek to objectify the issue, that is, make it as simple, factual and therefore as “non-arguable” as possible. In particular, if you are due a bonus, commission or other payment, seek out incontrovertible facts that you have achieved your objectives to combat both (a) subjective assessments (e.g., you did not make your manager “confident”), and (b) mischaracterizations of the facts (e.g., you did not complete “the deal” because the word “deal” included all other possible deals with that client in the future.)   

3. No employer has “sole and absolute discretion” to be illogical or irrational. – The key here is to take arguments based on “sole employer discretion” to their logical – and usually illogical – extreme. In the example above, the reason Brandon was not paid a bonus for the third deal was that, although closed and paid, it was possible that it could give rise to a dispute in the future. Well, that’s true about every single business transaction in the history of the world. If this was a valid basis for non-payment of Brandon’s bonus, then neither he nor any other Business Development Officer would ever be entitled to a bonus. Then why have a bonus program at all?

Likewise, recently a question was submitted to our blog by an employee who was to pay back relocation expenses for “two years from the last date the relocation services were provided.” Since this employee’s expatriation to another country necessitated continual assistance from the employer’s immigration attorneys, this could be read to make the employee’s repayment obligations last forever, a result that defies logic or rationality. If that was what was meant by that phrase, then why use the phrase “two years” at all?  (To read this Q&A, simply [click here].)

4. No employer has “sole and absolute discretion” to go beyond the limits of common sense or reasonability. – In the example above, Brandon was told that, while his territory included Detroit, his territory did not include a company whose offices were a mile outside the Detroit city limits. And as you might have guessed, no other Business Development Officer had a territory consisting of the suburbs of Detroit, or the suburbs of any other city, for that matter. Such a meaningless distinction – which has no basis in common sense or reasonability – is simply beyond the realm of discretion.

In fact, according to most dictionaries, the word “discretion” has two meanings:  (1) having a choice, and (2) within reasonable bounds. Consider this: Suppose a traffic court judge has no clear-cut guidelines for the penalties he or she can mete out for driving infractions, but is instead authorized by law to use his or her “unfettered discretion.” What do you suppose would happen if a driver was found guilty of making a left turn without first signaling, and for that infraction the judge sentenced the driver to 20 years in prison? It is absolutely certain the judge’s decision would be overruled as an abuse of discretion, even though he or she had supposedly “unfettered discretion.” Now, imagine what would have happened if the judge had sentenced the driver to the death penalty: the judge would in all likelihood be fired, for clearly abusing his or her supposedly unfettered discretion. You see, there are limits to supposedly “sole, absolute and unreviewable discretion.”

So, too, can an employer be denied the unfettered “sole discretion” to decide that a CEO’s job duties from now on include cleaning the company’s restrooms, even if the Board of Directors has the sole discretion to direct the CEO to take on new duties and responsibilities.

5. No employer has “sole and absolute discretion” to act in bad faith or commit fraud. – As a general matter of contract law, there is an assumed obligation placed on all parties to a contract to deal with each other in good faith, honestly, and without intent to deceive. This is referred to as “the implied covenant of good faith and fair dealing.” It is implied in every contract in order to reinforce the stated promises of the contract. We often see lawsuits based on this contract theory when one party to the contract attempts to claim the benefit of a technical excuse to dishonor its fulfillment of its promise, or uses specific contractual terms out of context to refuse to perform their contractual obligations, despite the obvious intent and understandings between the parties.

Though most employees do not have written contracts, when they are told that they will receive certain payments or benefits if they achieve certain goals, or certain events take place, they have a kind of contract, but it is an unwritten one, and equally enforceable. As noted above, this “implied contract” argument is used most frequently to prevent the false claim that “sole and absolute discretion” may be used by an employer to engage in actions based on an errant word, a confusing phrase, or a sentence taken out of context. 

I would suggest that, in Brandon’s case history, above, to deny him his bonus for a multi-million dollar transaction based on a one week delay related to a few photocopier warranties, in the context of a multi-million dollar deal, would constitute just such a “bad faith” act by his employer.

6. No employer has “sole and absolute discretion” to be inconsistent with itself. – Sorry, employers, no one can “have it both ways.” In Brandon’s case history, above, when HR claimed Brandon was not entitled to his bonus this year, logic, common sense, and rationality would all defeat his employer’s attempts to claim, next year, “Sorry, Brandon, that achievement related to last year’s bonus, not this year’s bonus.”

While no one is required to be 100% consistent 100% of the time, “sole and absolute discretion” does not permit an employer to be materially inconsistent with itself to deny employees what they clearly earned by their efforts.  

7. These six arguments are best presented by the employee internally, but if necessary, in Court. – I strongly and consistently urge my clients to always – with very few exceptions – attempt to achieve a respectful resolution of differences internally so as to avoid any sense of conflict or adversarial relation with their employers. It is a matter of pointing out “an error,” not accusing someone of “fraud.” That said, if respectful, internal resolution is unsuccessful, you need to weigh the real and potential advantages and disadvantages of seeking legal assistance.

Even if you seek legal assistance, make sure your attorney also first tries respectful, non-adversarial relations, for three important reasons: First, a “lawyer’s letter” sometimes carries more weight than an employee’s letter. Second, many lawyers proceed right to court, without first giving negotiation a real chance to work. I think the primary reason for this is that most lawyers have no – or next to none – negotiation training. Third, it is more in the lawyer’s financial interests to get you involved in a long and expensive legal battle. If your lawyer does not believe in his or her heart that negotiation should be given every possible chance to work before threatening or engaging in litigation, then you should seek out a new lawyer.   

In my experience over some 30 years of counseling, strategizing and representing employees in matters of their employment, compensation and severance, I have come across employers’ claims of “sole and absolute discretion” many times. Like others who have come across this problem, I too have found such instances to be frustrating and troubling, especially when it is used to justify the most outrageous shenanigans. However, don’t despair. I have found these six arguments to be quite persuasive, in negotiation and in court, and I’ve often used them to prevail in these circumstances. Don’t be intimidated, don’t be discouraged, and don’t feel powerless, for that, above all, would be true defeat in a time and situation that calls for you to be standing up for yourself at work. When treated unfairly, there are almost always ways to prevail. Understanding what works – as these arguments do – is the place to start.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and avoid risks at every point in your career. Knowing ways to resolve disputes when they arise is a distinct advantage in navigating workplace life. Knowing ways to avoid disputes is even more advantageous. Learning the “in’s and out’s” of doing so is what we are here for. Now it’s up to you.       

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.    

Please Note: This Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale. 

© 2011, Alan L. SkloverAll Rights Reserved. Commercial Use Prohibited.

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