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February 01, 2010
Promise to Pay Bonus Was Enforceable

The Texas Supreme Court has ruled that an offer to pay employees a bonus if they were still working for the employer when the company was sold is binding on the employer. It does not matter that when such a unilateral offer was made that either party could have terminated the relationship at any time before the sale.

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What happened. Less than a year after American Energy Services (AES) was formed in 1996, the eight original employees expressed their concern about the future of the company to the owner. To allay their fears and to keep them working for AES, the owner promised that if the company was ever sold, 5 percent of the proceeds of the sale would be paid to any of the original employees still working for AES at the time of the sale.

The company was sold in 2001 with seven of the original eight still employed by AES. They demanded their pro-ceeds, and when the company refused to pay, they sued, claiming AES breached the oral agreement. The trial and appeals courts held that the agreement was not enforceable because at the time the offer was made, there was only an “illusory” promise because as at-will employees, the seven never had an obligation to continue working for AES, and AES could have terminated them at any time.

What the court said. AES argued that it did not have to pay based on the earlier Texas Supreme Court ruling that consideration for a promise, by either the employee or the employer in an at-will employment, cannot be dependent on a period of continued employment (Light v. Centel Cellular Co. of Texas, 1994). Such a promise would be illusory because it fails to bind the promisor, who always retains the option of discontinuing employment in lieu of performance. When illusory promises are all that support a purported bilateral contract, there is no contract.

The Supreme Court, however, determined that that precedent was not applicable to the situation of the AES employees. When the AES owner made the 5 percent offer there was actually no contract or agreement. The employees made no return promise either real or illusory. What did happen was that AES made a unilateral offer that it could have withdrawn at any time. The offer was never withdrawn. The contract was formed when the company was sold, with the seven employees performing their side because they were still on the AES payroll. The court ruled that AES was then bound to perform its side of the contract by paying the employees the promised amount. Vargas v. American Energy Services, No. 07-0520 (12/18/2009).

Point to remember: If AES wanted to get out of its offer, it could have done so at any time by withdrawing it or terminating the employees before selling the company.

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