Are Associate Bonuses “Wages”?
A Brief History Of Associate Bonuses
The history of bonus payments to associates at law firms is a tale of ups and downs, twists and turns, and a whole lot of debate. It began in the 1980s, when a select few elite law firms started doling out bonuses to their top-performing associates. This was a revolutionary move at the time, as bonuses were typically reserved for partners, not associates. But as the legal market grew more competitive, more and more firms jumped on the bonus bandwagon, and by the 1990s, it was the norm for top-tier firms to offer bonuses to associates.
However, the dot-com bust of the early 2000s hit the legal industry hard, and many firms froze or cut bonuses. But as the economy improved and demand for legal services increased, firms started handing out bonuses again, and by the 2010s, it was not uncommon for even mid-sized firms to offer bonuses to associates. Today, bonuses are still a debated issue in the legal industry, with some firms doling them out generously, while others have done away with them altogether.
Understanding the Importance of ‘Wages’ Under the New York Labor Law
Somewhat unsurprisingly, whether bonus payments to law firm associates are considered “wages” under the New York Labor Law is an oft-litigated issue in employment disputes. This is significant because New York’s public policy and statutes severely penalize employers who improperly deduct amounts from employees’ “wages.” New York has a long-standing policy against the forfeiture of earned wages. Employers are required to pay employees “wages” and are prohibited from making any deductions from wages unless permitted by law, as per N.Y. Labor Law Section 193(1)(a)&(b).
Are Law Firm Bonuses ‘Wages’?
The Appellate Division discussed the issue of what constitutes a “wage” in the law firm context in Doolittle v. Nixon Peabody, 155 A.D.3d 1652 (App. Div. 4th Dept. 2017). There, the court determined that an employee’s bonus, which was based upon the plaintiff’s performance, could be “nonforfeitable wages” and affirmed the denial of a motion to dismiss. The court based its decision, in part, on the language of the employee’s agreement. It stated that:
“there is language in the 2009 agreement that could be read as providing that plaintiff’s bonus was predicated on his personal productivity…to the extent the production bonus was not discretionary and, instead, was based only on plaintiff’s performance as a manager during his final trimester of employment-a question not conclusively answered by language of the agreement-the bonus could constitute nonforfeitable ‘wages’.”
Why is this Important for Law Firms to Understand?
It is important for law firms to understand the laws and regulations surrounding wages and bonuses in order to avoid potential legal disputes and penalties. Law firms should ensure that their contracts and agreements with employees clearly define the terms and conditions of bonuses, and that they are compliant with state laws and regulations. Misunderstandings or disputes over bonuses can lead to costly legal proceedings and damage to the firm’s reputation.
Our accounting firm specializes in providing accounting services to law firms, and we can help law firms navigate the complexities of the laws surrounding wages and bonuses. Our team of experienced professionals can assist with contract review and compliance, payroll, tax planning, and associate bonus wage issues. By working with our firm, law firms can ensure compliance with state laws and regulations, and avoid potential legal disputes related to wages and bonuses.
Please note that the information provided on this website is for general informational purposes only and is not intended as legal or tax advice. The information is subject to change, and it is important to consult a specialist before making any decisions. Law Ledgers provides accounting and CPA services to New York lawyers and law firms, including escrow protection, tax advice and bookkeeping administration. Contact us today for personalized support.
