by Tara Eberline

The Kansas Court of Appeals recently affirmed that an employer may change an at-will employee's compensation going forward as long as it notifies the employee of the change before implementing it. Read on to find out how one employer took the proper steps to protect itself from a breach-of-contract claim when it changed the company's bonus structure.

Initial agreement

Lana Smith applied for a job as a physical therapist for Kansas Orthopaedic Center (KOC) in 2007. On the job application, she signed an acknowledgment that if she was hired, she would be an at-will employee, and no one acting on behalf of the company could bind it to anything to the contrary. She accepted the position.

Smith's compensation terms were confirmed in a letter that provided for a specified starting salary plus "a bonus guarantee of $10,000." The letter also noted that she would receive annual merit evaluations "with the potential of a salary adjustment on or about the anniversary date." At the time she accepted the job, she received a copy of the employment handbook, which included a provision stating that her employment was at will.

New deal

In 2008, KOC notified Smith that it was changing its bonus plan. She understood that the plan was changing, and she continued to work for the company for several years. Between 2008 and 2011, her hours and work schedule changed a number of times, often at her request. She resigned from KOC on December 14, 2011.

Following her resignation, Smith sued KOC for breach of contract, arguing that it had guaranteed her a bonus of $10,000 for every year of her employment. In response, KOC stated that she was an at-will employee and the compensation letter didn't obligate the company to pay the $10,000 bonus throughout her employment.

The district court agreed and ruled in KOC's favor. Smith then appealed to the Kansas Court of Appeals.

Court: Right to fire = right to decrease pay

The court of appeals agreed with the district court. It began by explaining that Smith was an at-will employee. Accordingly, she could be fired at any time and for any reason (other than an illegal reason, such as discrimination or retaliation). KOC provided Smith clear notice that she was an at-will employee when it hired her (and, in fact, even before she was hired).

The court then explained that the logical corollary to the rule that at- will employment can end at any time is that either party can announce new employment terms that will apply going forward at any time.

According to the court, the "power to terminate the employment relationship necessarily includes the power to change the terms of employment so long as it is done prospectively and the employee is notified of the changed terms." That includes an employer's power to make prospective changes to compensation or bonuses.

KOC's letter to Smith didn't specify that the bonus guarantee was only for the first year, and she testified that she didn't remember being told that the bonus guarantee was limited to the first year. But, the court explained, even if KOC had initially guaranteed the annual bonus for as long as Smith worked there, it could still change her compensation as long as it applied the changes prospectively after notifying her.

Thus, any subjective belief Smith may have had that the bonus would be provided every year was insufficient to maintain a claim against her former employer. Smith v. Kansas Orthopaedic Center, P.A., 2013 WL 6835990 (Kan. Ct. App., Dec. 27, 2013).

What to remember

There are two lessons you can take away from this case. First, if you want to change an employee's compensation, you need to do it on a prospective basis after giving the employee notice.

Communicate the changes to the employee clearly so she can choose whether to accept the new employment terms or find other employment. An employee's continued employment after the announcement and implementation of new employment terms will be deemed her acceptance of those terms.

Second, this case serves as a reminder of how helpful at-will disclaimers can be. Typically, employers use at-will disclaimers to ensure that employees understand they aren't guaranteed employment for any set time period and can be let go at any time. But disclaimers are equally valuable in ensuring that specific employment benefits, such as compensation and bonuses, aren't guaranteed for any set period, either.

If you communicate clearly with your employees about their employment and compensation status, you'll give your company more flexibility in managing its workforce and put yourself in a better position to defend your actions if an employee later raises a complaint.

Tara Eberline is an employment lawyer with the law firm of Foulston Siefkin LLP. You can contact her at 913-253-2136 or teberline@foulston.com.