by Cathleen S. Yonahara

To entice key employees to remain with the company until the sale of the business was complete, an employer offered them a bonus large enough to allow them to retire. However, after the business was sold, the employer refused to keep its promise. The employees sued to recover the promised bonus. A California court of appeal recently decided whether they could pursue their lawsuit.

Promises, promises

Irma Moncada, Randy Morris, and Everardo Serrano (collectively, the key employees) worked for West Coast Quartz Corporation. Paul Maloney and Nancy Tkalcevic, the owners and sole shareholders of West Coast, planned to sell the company.

To convince the key employees to remain with the company until the sale was complete, the owners repeatedly promised that if they continued to work for West Coast until it was sold, they would be paid a bonus from the sale proceeds that would be sufficient for them to retire.

Based on that promise, the key employees remained at West Coast for five years, declining job opportunities with other companies during that time. When the owners sold West Coast in 2009 for about $30 million, they didn't pay the key employees the promised bonus. The employees sued on several grounds, including fraud and breach of contract.

In an attempt to get rid of the case in the early stages of litigation, the owners filed a "demurrer" (i.e., a motion to dismiss on the ground that the complaint fails to state a claim for relief). The trial court agreed with the owners' arguments, sustained the demurrer, and entered judgment in their favor. The key employees appealed.

Valid claim for retirement bonus?

The appellate court found that the key employees' allegations were sufficient to establish all the elements of fraud. The employees alleged that to induce them to continue to work at West Coast until the company was sold, the owners repeatedly stated that they would pay the employees a retirement bonus at the time of the sale that would be sufficient for them to retire.

However, those representations were false because the owners intended to pay them a nominal bonus or no bonus at all when the business was sold. The employees didn't seek or accept alternative employment opportunities and remained at West Coast because of the promise of the bonus.

The owners argued that the key employees' breach-of-contract claim failed because the amount of the promised bonus was unspecified and subject to different interpretations. According to the owners, the promise of an amount "sufficient to retire" was simply too vague to be enforced.

The appellate court wasn't persuaded and found that the amount of the retirement bonus could be determined by using information about the key employees' debts and obligations, their lifestyles at the time, and actuarial information.

The owners further argued that the key employees failed to articulate a valid claim of promissory estoppel. Promissory estoppel is the principle that a promise becomes binding if the promise maker intends the promise to induce reliance, a party actually relies on the promise, and nonenforcement of the promise will cause injury or injustice.

The appellate court found that the key employees made a valid claim for promissory estoppel because they detrimentally relied on the owners' promise to pay them an amount sufficient to retire on after the business was sold if they remained employed until that time, and they didn't pursue other employment opportunities because of that promise.

Finally, the owners claimed that the key employees couldn't articulate a valid claim for intentional infliction of emotional distress. This time, the appellate court agreed with them. Although the appellate court found that the owners' conduct demonstrated a callous disregard for the key employees' professional and personal well-being, it wasn't "extreme or outrageous," which is necessary to establish a claim for intentional infliction of emotional distress.

The appellate court reversed the trial court's order sustaining the owners' demurrer and ordered them to answer the key employees' complaint on the claims for fraud, breach of contract, and promissory estoppel. Moncada v. West Coast Quartz Corp. (California Court of Appeal, 6th Appellate District, 2013).

Bottom line

Sometimes a defendant will try to get a case dismissed early by filing a demurrer alleging the complaint fails to articulate any valid legal claim. However, dismissal at such an early stage in the litigation process rarely occurs, and demurrers are often a waste of time and expense.

In this case, the employer's attempts to throw out the employees' lawsuit to recover their promised retirement bonus were unsuccessful. The court's decision serves as a reminder that promises to pay a bonus, even if they're made informally without a written agreement and without specifying a particular amount, will be enforced. Be careful what you promise.

The author can be reached at Freeland Cooper & Foreman LLP in San Francisco, yonahara@freelandlaw.com.