When his bonus plan was terminated midterm, a college recruiter sought payments for students who had yet to complete their studies.

What happened. “Travis” worked as a recruiter for a culinary arts college of Career Education Corporation (CEC) in Illinois. Under CEC’s bonus plan, Travis received $400 for every student he recruited beyond a set threshold as long as the student completed a full year or a full program of study. The plan stipulated that on any given day, a representative was entitled to bonuses only for students who had completed the requisite studies and that the CEC reserved the right to terminate the program at any time.

In October 2010, the U.S. Department of Education (DOE) issued regulations prohibiting such recruitment bonuses as of July 2011. Shortly after, the CEC announced that in order to comply, it would end the bonus program in February 2011 and pay bonuses earned through February 28. Bonuses for “pipeline” students who were enrolled but had not completed the required studies by that date would not be paid.

At the time, Travis had 24 eligible recruits in the pipeline. Only one completed the requirements on time, leaving Travis with a $400 bonus. Travis filed a class action lawsuit claiming that the CEC terminated the plan in bad faith. A district court dismissed the case, and Travis appealed.

What the court said. In a mixed decision, the 7th Circuit Court of Appeals, which covers Illinois, Indiana, and Wisconsin, overturned the ruling. District Judge Sara Darrow noted that “an employer acting under an express contract provision can still breach the contract by exercising its discretion contrary to the reasonable expectations of the parties.”

She found that CEC’s stated reason for the plan’s termination—the new DOE regulations—did “not square” with its timing, 4 months before the regulations took effect. “This mismatch in explanation and action raises a permissible inference that the but-for reason for CEC’s action was to avoid” paying bonuses, Judge Darrow wrote.

Circuit Judge David Hamilton noted that the contract was “very explicit” about “what would happen to [Travis’s] bonuses if students dropped out or if he was fired or quit” but “silent” about the possibility that the CEC would “decide one day to keep all the employees’ pipeline bonuses.” Dissenting Circuit Judge Diane Wood found the contract unambiguous, however, writing that “no contract ever spells out how the parties plan to address every tiny detail that might arise.” The case was remanded for trial. Wilson et al. v. Career Education Corporation, 7th Circuit, No. 12-2383 (8/30/2013).

Point to remember. A contract may reserve broad discretion for one party, but “opportunistic” acts may nonetheless constitute a bad-faith breach.