Last year, a Manhattan federal district judge reviewed a decision of a federal bankruptcy court and held that Lehman Brothers was not required to pay a $350,000 performance bonus referenced in the offer letter of a prospective employee who never provided services. In doing so, the Court observed that the Firm terminated the contractual relationship prior to the prospective employee performing work contemplated by the offer letter contract and prior to her official start date, and that there was no evidence that the bonus was intended as a “sign on” bonus to be paid prior to the performance of her duties. The Court of Appeals for the Second Circuit has now affirmed the District Court. Ortegon v. Giddens, 2016 U.S. App. LEXIS 404 (2d Cir. Jan. 12, 2016).

Analyzing the language of the offer letter signed by the prospective employee, the Second Circuit observed that the offer letter, which it found to be a binding contract, provided that the bonus was part of the prospective employee’s compensation for her anticipated performance, not a sign-on bonus. The plaintiff-appellant conceded that she never commenced any duties related to the offered position and that her formal start date was revoked prior to her starting work. As such, she had not commenced performance under the contract and therefore was not entitled to the bonus. The Court further found that she never became an “employee” for purposes of the contract; instead, her employment was to commence on her start date, which would have been the beginning of her performance.

The decision highlights the importance of clarity in offer letters and other documents addressing incentive compensation, aided by counsel as appropriate.