On December 22, 2016, the 7th Circuit affirmed the district court’s order granting summary judgment to the defendant on a claim under Illinois law that it violated the covenant of good faith and fair dealing by failing to pay the plaintiff his bonuses under his employment contract. Wilson v. Career Education Corporation, No. 16-1063 (7th Cir. 12/22/2016). The plaintiff alleged that the defendant owed him the payment of bonuses under an incentive compensation provision in his employment agreement. He alleged that the defendant violated the implied covenant of good faith and fair dealing, which is implied in all contracts under Illinois law. The bonus plan explicitly reserved to the company the right to terminate or amend the plan at any time for any reason at its sole discretion. However, this type of discretionary provision in a bonus plan is still subject to the covenant of good faith and fair dealing and, therefore, does not provide a company with absolute unfettered discretion to terminate an employee’s bonus payments.
Although the company in this case retained the right to terminate the bonus plan, under the implied covenant of good faith and fair dealing, the company’s discretion to terminate the plan and refuse to pay the unearned bonuses is limited by the reasonable expectations of the parties. Thus, the plaintiff could prevail on his claim if he could prove that the company exercised its discretion in a manner contrary to the reasonable expectations of the parties. An opportunistic and arbitrary decision to terminate bonuses, without any legitimate business reason, would violate the reasonable expectations of the parties. Modifications to a bonus plan made in bad faith create liability for violation of the bonus plan. An avowedly opportunistic plan termination or a modification that arbitrarily deprives an employee of a bonus payment is bad faith. The question is whether the company’s actual motive was improper and whether the termination or modification failed to comport with the parties’ reasonable expectations. In this case, the plaintiff failed to establish an improper motive, and actually conceded that the company faced a serious financial decline (upon which it justified its termination of the bonus plan). Therefore, the evidence was insufficient to allow a jury to reasonably conclude that the company breached the implied covenant of good faith and fair dealing.