In October 2015, the Second Circuit Court of Appeals ruled that an employer’s reduction of an employee’s discretionary bonus constitutes an adverse employment action and may support an employee’s discrimination claim. Davis v. New York City Dep’t of Educ., 2015 U.S. App. LEXIS 18115 (2d Cir. 2015).
In Davis, a teacher, took an extended leave of absence after injuries suffered in a car accident. As a result of her leave of absence, Davis’ employer reduced her bonus from $3,000 to $1,000. The Second Circuit held that the reduction of Davis’ bonus constituted a materially adverse action even though Davis’ discrimination claim ultimately failed.
The Second Circuit found that the “fact that the employer has discretion whether to grant bonuses or raises does not support the conclusion that an employer may freely allocate them on the basis of racial or religious bias, or disability discrimination.” It noted that most business decisions are discretionary. Employers have discretion in deciding who to hire, fire, and promote, but the fact that those decisions are discretionary does not protect them from discrimination statutes. The Second Circuit sees no reason to analyze bonuses differently.
The Second Circuit’s Davis expressly refused to follow the law of the Seventh Circuit, which treats employers’ decisions about discretionary bonuses as “beyond the reach of discrimination statutes” because bonuses tend to be “sporadic, irregular, unpredictable, and wholly discretionary,” as opposed to raises, which are the normal, expected reward for satisfactory work. Hunt v. City of Markham, 219 F.3d 649 (7th Cir. 2000).
After this ruling, the state of the law governing reductions in discretionary bonuses and raises is unclear. Both the Second Circuit and D.C. Circuit hold that the denial or reduction of a discretionary bonus is materially adverse. On the other hand, the Seventh Circuit treats decisions about bonuses as “wholly discretionary.” To be on the safe side, employers should ensure that they have documented reasons explaining all decisions regarding bonuses to avoid legal problems while the law on this issue continues to develop.