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Can AIG avoid paying out retention bonuses?

The blogosphere is filled today with articles about AIG and the controversial retention bonuses.  One fellow blogger has included AIG’s white paper on this topic in which it explains why it believes that it cannot avoid these payments.  Generally, retention bonus contracts require an employee to be paid if he/she stays with the company through a certain date.  Of course, it is always essential to see the actual terms of these contracts in order to determine if the money is due.

One term, however, that is contained in every contract, regardless of its express terms, is that the employee materially perform his/her duties in order to be entitled to take advantage of its terms.  We learn this in first year law school:  material breach by one party excuses performance by the other.

In Connecticut, this principal has been applied by our Appellate Court in the employment setting.  In Shah v. Cover-It, Inc., 86 Conn.App. 71 (2004), that court held that an employee materially breached his employment contract by not working hard enough and was therefore not entitled to contractual severance pay.

I admit that I have no personal knowledge of how hard the AIG employees in question worked, but it seems to me that there may be a claim that by their poor performance, they have bankrupted the company.  If their trading in risky mortgage backed securities was knowingly reckless and exposed AIG to this risk, I would think that AIG could claim that they materially breached their contracts and are therefore not due their retention pay.

AIG claims in its white paper that it cannot legally deny these employees their pay and that they have been so advised by outside counsel.  While I don’t know who these lawyers are, I can assure you all that they are probably the same type of corporate defense attorneys who routinely deny legitimate claims for earned compensation in my cases and in the suits brought by my brothers and sisters of the Connecticut plaintiff’s employment bar.

I say that AIG should deny the retention pay and let the employees sue.  They will have to prove that they materially performed and we will all get to go to the public trial on this issue and hear them explain how their risky trading was not a material breach.  I can even suggest a few aggressive employment defense attorneys to defend AIG!