Panera Bread employs general managers in its restaurants throughout the country. These general managers are at-will employees. However, the company implemented a bonus plan for its general managers and had them sign a contract outlining the plan. Is the bonus contract enforceable even though the managers are at-will employees? Under what circumstances, if any, can the company change the terms of the contract?

A group of managers filed a lawsuit against Panera in which the court was required to resolve those issues.

Panera Creates a Sticky Situation

Panera Bread wanted to recruit and retain general managers for its various restaurants. It created a program in which qualified managers could receive a large one-time bonus based on performance.

A few years after creating the program, the company asked the managers—who were at-will employees—to execute an employment agreement that outlined a compensation plan. The plan explained that the one-time bonus would be paid five years after the managers signed the agreement, and the amount would depend significantly on the profitability of the individual manager's restaurant during the last two years of the five-year period. The plan also required that they still be employed as managers at the time the bonus was payable.

In 2010, Panera decided to set a $100,000 cap on the amount of the bonus in an effort to control costs. Managers were informed of the cap in 2011 and told it would become effective in January 2012. The first complaint about the cap didn't occur until 2014. It was raised by a manager shortly before he received his bonus.

Managers Turn Up the Heat

Three managers filed a lawsuit against Panera in federal district court in Missouri on behalf of themselves and other similarly situated managers. The district court then certified a class of about 67 managers in the case.

The managers asserted that Panera breached their contracts by imposing the cap. In response, the company argued that they had orally terminated and replaced the agreement. It claimed that through their words and actions, they had assented to a new agreement containing the cap. It further asserted that they waived any claims regarding the cap by continuing to work without complaint and were now precluded from raising any claims.

Finally, Panera argued that an economic downturn allowed it to impose the cap because the purpose of the contract had become commercially frustrated.

Panera Gets Burned

The managers filed a request for summary judgment (a ruling in their favor without trial) claiming that based on the undisputed facts and Missouri contract law, Panera's attempt to implement the cap was invalid and therefore wasn't enforceable. The district court agreed.

Panera then appealed to the 8th Circuit. The 8th Circuit applied Missouri state contract law and first considered whether the bonus contract was a bilateral or unilateral contract. A bilateral contract contains mutual promises imposing a legal duty on each promisor, and a unilateral contact requires only one party to make a promise.

Here, Panera offered the bonus contracts to its qualified managers, promising to pay the bonuses as outlined in the contract. Because the managers were at-will employees, their employment could be terminated by either party at any time. The court reasoned that an at-will employee's promise to work for an employer until he decides to quit is no promise at all. Therefore, it concluded that the company's "promise to pay a bonus in return for an at-will employee's continued employment was an offer for a unilateral contract."

The next issue was whether Panera could modify the terms of its unilateral offer by placing a cap on the bonus. The Missouri Court of Appeals has previously held that an offer to make a unilateral contract may not be revoked or modified after the person to whom the offer is made has rendered a substantial portion of the requested performance.

Based on that authority, Panera asserted that the mangers had to "substantially perform" under the offer to prevent it from modifying the offer. However, the 8th Circuit isn't bound by federal court decisions in this case. Rather, it's bound only by decisions of a state's highest court on questions of state law, and the Missouri Supreme Court hasn't addressed how much performance is necessary to make a unilateral-contract offer unmodifiable.

As a result, the 8th Circuit was left to predict how the Missouri Supreme Court is likely to resolve the issue. It determined that if presented with this issue, the supreme court is likely to conclude that the person to whom the offer is made must only begin performance to render the offer irrevocable and to prevent the one making the offer from modifying its terms. For this reason, substantial performance isn't required.

In this case, the managers had already begun performance under their offered contracts when Panera instituted the cap. Therefore, the 8th Circuit concluded that the company couldn't legally modify the terms of the offer, thereby making its imposition of the cap ineffective.

The contract expressly recognized that the managers would remain at-will employees during the five-year bonus period. The 8th Circuit noted that the fact that the managers were at-will employees didn't mean that the bonus promise was illusory. However, Panera could have fired them, which would have prevented them from receiving the bonus, but it didn't. It also could have adjusted the variable in the bonus formula—over which it did have control—but it didn't. Because the managers had already started performing the unilateral-contract offer, it couldn't "move the goalposts on them by imposing a bonus cap" that wasn't contemplated in the offer.

The 8th Circuit explained that if an employer wants to reserve the power to modify or terminate a unilateral contract offer, the language in the offer should be clear. For example, if it offers an employee a bonus it says is "voluntary" and the employee agrees that the bonus may be "withheld, increased, decreased, or discontinued, individually or collectively, with or without notice," then no employee could reasonably rely on actually receiving a bonus. But no such language was present in this case.

The appeals court also rejected Panera's argument that by continuing to work, the managers accepted the cap. Silence doesn't automatically mean acceptance. Something more than the employees' continuance of work is necessary to show that they accepted a unilateral modification to employment terms.

Finally, the 8th Circuit rejected Panera's other defenses, including its commercial-frustration defense. This defense is only available if, among other things, an unforeseeable event occurs. If the event is foreseeable, then it should be included in the contract. When the event isn't provided for, then the risk falls on the one making the offer.

Here, Panera imposed the cap because a change in general business conditions made the bonus payout too expensive. But such a decline in general business conditions is foreseeable because business is risky and the market is undependable. Because Panera could have accounted for lower-than-anticipated profits when it devised the bonus plan but didn't, it bears the risk.

Bottom Line

This case is a great example of how critical it is to draft clear and comprehensive contracts—particularly when forming a unilateral contract with an at-will employee. It's also illustrative of how you should take the time to anticipate possible occurrences that could affect your ability to perform your obligations under the contract and to address such possibilities directly within the contract. This will help to control employee expectations and minimize your risk if such an occurrence does arise.

Future modifications to the contract also have to be consistent with its language and with general contract laws, realizing that they can vary somewhat state by state. Rather than make a unilateral change to a contract that may not be enforceable, you need to consider whether the employee accepted the initial offer and whether his performance under the contract has begun. Also keep in mind that an at-will employee's continued work may not constitute acceptance of a change.

Following this process and considering these issues along the way will minimize your risk and maintain reasonable expectations with your employees.

This article appeared in the Missouri Employment Law Newsletter.