The Importance of Consideration When Altering Employee Compensation Packages

By Christine S. Coleman - McMahon Berger, P.C.

January 11, 2018

A question that often arises in the employment setting is whether an employer can change the terms of an agreement it has with its employee(s) without giving any consideration for such a change. In Boswell v. Panera, LLC, Case No. 16-3230 (8th Cir. Jan. 5, 2018), the Eighth Circuit Court of Appeals recently held that Panera Bread breached the contractual obligations it owed to its general managers after Panera placed a cap on previously agreed to management bonuses.

As part of a bonus program designed to attract and retain management, Panera asked its general managers to sign employment agreements that provided for bonuses to be paid after five years. In order to be eligible for the bonus, the employee had to be a manager under the program at the time when the bonus became payable. The amount of the bonus depended significantly on how profitable the respective manager’s restaurant was during the final two years of the five-year agreement.

In 2010, after Panera determined that the structure of the bonus plan was going to be too costly to carry out, it capped the bonuses at $100,000. Though there were no complaints at the time of the change, several years later, in 2014, two of the managers brought a class action lawsuit against Panera for breach of contract and fraud, along with individual claims for fraud and unjust enrichment.

Panera asserted it had not breached its contract because the employees agreed to the cap verbally, they continued to work after being notified about the cap, and that putting the cap in place was necessary as a result of the economic downturn.

The trial court found that Panera breached its contract because the employees had substantially performed. The Eighth Circuit came to the same conclusion, although it took the trial court’s position to the next level, holding that Panera breached the contract because the employees began performance under the contract. Because the employment agreements were unilateral contracts, they were formed and became irrevocable when the offeror – Panera – received performance from the employees – their continued employment –in return for Panera’s promise to pay the bonus.

Panera’s attempt to modify the employees’ compensation was not a valid substitution of the original contract – or a novation – because it was not accompanied by additional consideration. The Eighth Circuit also joined the trial court in rejecting Panera’s argument that the managers accepted the terms of the new bonus structure by continuing to work without complaint. The court held “silence is not automatically acceptance,” and relied on the employees’ written acceptance of the terms set forth in the employment agreements. Finally, the court disagreed with Panera’s commercial-frustration defense because the economic downturn was foreseeable and, therefore, it should have been addressed in the contract.

Employers should take care to make sure employment contracts and modifications thereto are accompanied by consideration. While an offer of employment can establish consideration, continued employment – even if it is accompanied with a raise, may not. In Missouri, for example, continued employment will not constitute valid consideration. If operating in a jurisdiction that does not view continued employment as consideration, then employees must be offered something of value to which they would not otherwise have been entitled in connection with new or modified employment agreements or restrictive covenants (such as non-compete agreements).

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.