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April 03, 2009
What Did Breach of Contract Mean for Bonuses?
Does an employee’s playing fast and loose with his employer’s money release the company from paying bonuses to that employee? A state court of appeals recently faced that question.

What happened. “Charles” began working as a sales representative and project manager for Laughlin Environmental (LEI), a company specializing in environmental remediation services, in 1995. His contract required him to devote all his time and energy bringing in new business and supervising projects. It also entitled him to “field profit bonuses,” payable after customers paid the company upon the completion of a project.

When LEI’s vice president confronted Charles with a claim that he had been charging the company’s account for personal purchases, Charles admitted that he had not reimbursed LEI for $4,000 of expenses incurred on LEI’s credit, that he had routinely used LEI’s gas card for personal expenses, and that he had charged LEI’s account for materials for, and used LEI employees to, build driveways for himself and acquaintances, all without authorization.

Charles quit LEI in 2001 amidst a dispute that he wasn’t receiving certain field-profit bonuses to which he thought he was entitled. He sued the company on a number of bases, including breach of contract, fraud, and negligent misrepresentation. A jury of the Harris County court decided that Charles had breached his duties to the company, committed fraud against it, and engaged in inequitable conduct. He appealed, claiming that the jury had not had enough evidence to reach that decision.

What the court said. Reviewing the evidence that had been before the jury, the appellate court said that the evidence clearly showed that Charles placed his interests above the company’s interests and did not exercise utmost good faith. The evidence showed that Charles used LEI’s equipment and labor to build the two driveways, used LEI’s credit for personal gas and other purchases, and concealed these actions from LEI. But his job required him to act primarily for the benefit of LEI, not himself, in matters connected with his employment, and he also had the duty to deal fairly and openly with LEI and to fully disclose to LEI information affecting its business.

Because he had breached his contract, LEI was discharged of its duty to pay the disputed bonuses. The court upheld the verdict. Grant v. Laughlin Environmental, Court of Appeals of Texas, First District, Houston, No. 01-07-00227-CV (2008).

Point to remember. A jury’s finding that an employee has breached his contract generally frees an employer from any promises made under that contract.

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