Can a West Virginia state agency include performance incentives in an employee's contract, and can it pay severance under a litigation settlement after the employment ends?

Official title

Opinion of the Attorney General's Office Regarding the Payment of Performance Incentives and Payments to State Employees Pursuant to a Settlement Agreement

Plain-English summary

The State Auditor asked about a particular state agency's contracts with a former employee. The AG anonymized the request to avoid disclosing details that might violate a confidentiality clause without first deciding whether that clause was enforceable.

The first contract was an employment agreement: a base salary for a set number of years, plus performance incentives that paid extra if the employee hit specific goals. If the agency fired the employee for cause, no further compensation was owed. If fired without cause, the employee was entitled to base salary for the remaining contract term.

The second contract arose later: a litigation settlement in which the employee resigned and released all claims, in exchange for the base salary remainder plus an additional amount.

The AG addressed two questions, deferring the confidentiality issue for lack of facts.

Performance incentives are allowed. W. Va. Const. art. VI, § 38 bars "extra compensation" granted "after the services shall have been rendered or the contract made." But pre-bargained performance incentives, written into the contract from day one, are not "extra" because they are part of the original deal. The Supreme Court of Appeals has long allowed prospective compensation tied to future performance: contemporaneous raises for new duties (Cooke v. Jarrell), annual incremental adjustments (63 W. Va. Op. Att'y Gen. 37), and salary increases at the start of new judicial terms (Harbert v. Harrison County Court). The AG's 1981 opinion (59 W. Va. Op. Att'y Gen. 86) had previously suggested that teacher leave-cash-out arrangements could be made constitutional by writing the option into employment contracts in advance. Other states with similar provisions read them the same way (City of Omaha v. City of Elkhorn).

A second, independent ground supported the conclusion: § 38 applies only to compensation "definitely fixed or prescribed by law" (Rucker v. Bd. of Supervisors of Pocahontas County). Where the agency had statutory discretion to set the employee's compensation by contract (and was exempt from Division of Personnel rules), § 38 did not apply at all.

W. Va. Code § 12-3-13 (no payment before services rendered) was satisfied because the contract conditioned each incentive payment on the employee actually completing the specified task or hitting the specified metric.

The settlement payment is also allowed. The agency had statutory power to manage its financial and business affairs, which includes settling legal claims. The release of claims provides new consideration outside the original employment relationship, taking the settlement payment outside § 38's scope.

The AG declined to address the confidentiality clauses or broader appropriations questions without more facts.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What is the difference between a "performance incentive" and a "bonus"?

A: For § 38 purposes, the line is when the agreement was made. A performance incentive written into the contract from day one is bargained-for compensation tied to future performance. It is not "extra" because the employee accepted the job knowing the incentive was part of the deal. A bonus paid after the work is done, without contractual basis at the start, is "extra compensation" the constitution forbids.

Q: Why is the salary-fixed-by-law point a separate ground?

A: § 38 applies to public officers, agents, servants, and contractors, but the Supreme Court has read it (in Rucker v. Pocahontas County) to cover only compensation "definitely fixed or prescribed by law." If the agency has discretion under its enabling statute to negotiate compensation by contract, the analysis under Rucker says the constitutional restriction simply does not apply. So even if a payment looks like extra compensation in form, no § 38 violation arises if the underlying salary was discretionary.

Q: How does W. Va. Code § 12-3-13 fit in?

A: § 12-3-13 says "[n]o money shall be drawn from the treasury to pay the salary of any officer or employee before his services have been rendered." It bans signing bonuses or upfront payments. It does not bar payment-on-completion incentives because those satisfy the "services have been rendered" condition by their own terms.

Q: Can a public employer agree to severance in advance?

A: Yes, if the severance is part of the original contract. City of Omaha v. City of Elkhorn (Nebraska) held that bargained-for severance does not violate Nebraska's parallel constitutional provision. The Ethics-of-Public-Compensation framework applies similarly here: a forward-looking, contractually grounded payment is not "extra."

Q: Can a public employer settle a legal claim by paying the former employee?

A: Yes. The release of legal claims is new consideration. § 38 does not bar payments where the public employer is buying something of value (here, the release) it didn't already own. The AG has long treated settlement payments as outside the extra-compensation framework. (See also the August 17, 2015 AG opinion on Mountwest Community and Technical College, which referenced settlements as a recognized exception.)

Q: Why didn't the AG address the confidentiality clauses?

A: Because the AG didn't have enough facts to apply the framework. The general rule from Daily Gazette Co. v. Withrow is that public-body settlements are subject to FOIA disclosure, but exceptions exist. Without specifics on whether any exception applied, the AG could not advise on whether the Auditor was bound to honor the confidentiality clauses or could publicly disclose the settlement.

Q: Are these rules the same for all West Virginia public employees?

A: Mostly. The art. VI, § 38 framework applies to public officers, agents, and contractors. The exact application depends on whether the position has a statutorily fixed salary (Rucker), whether the employee is contractual or at-will, and what the agency's authorizing statute says about compensation discretion. The general principles, prospective contractual incentives are allowed, retroactive bonuses are not, hold across most state employment.

Q: Could a public employer offer a "retention bonus" structured as deferred pay?

A: A retention bonus paid as compensation for staying through a future date is essentially a forward-looking incentive. Written into the contract from the start, it satisfies the same framework that allows performance incentives. Added later as a one-time gratuity for past loyalty, it would likely run afoul of § 38.

Background and statutory framework

The constitutional ban. W. Va. Const. art. VI, § 38: "No extra compensation shall be granted or allowed to any public officer, agent, servant or contractor, after the services shall have been rendered or the contract made . . . [n]or shall the salary of any public officer be increased or diminished during his term of office."

Two readings of "extra compensation." The Supreme Court of Appeals' line of cases distinguishes after-the-fact gratuities (forbidden) from bargained-for prospective compensation (allowed). Harbert v. Harrison County Court (raises at the start of new judicial terms allowed), Cooke v. Jarrell (extra pay for new duties allowed), Springer v. Board of Education and Goodwin v. Rogers (extra pay for new duties "beyond the scope or the range of the office as it formerly existed or functioned"), and Delardas (extra pay for incidental new duties not allowed). 1990 AG opinion 63 W. Va. Op. Att'y Gen. 37 confirmed that statutory annual incremental increases are forward-looking adjustments, not bonuses.

The Rucker exception. Rucker v. Bd. of Supervisors of Pocahontas Cnty., 7 W. Va. 661 (1874), narrows § 38: it applies "only to such salaries or compensation of public officers as have been definitely fixed or prescribed by law; either by the Constitution of the State or by statute." Where compensation is set by contract under statutory discretion, § 38 does not apply.

The pay-on-rendering rule. § 12-3-13: "[n]o money shall be drawn from the treasury to pay the salary of any officer or employee before his services have been rendered." Performance incentives that pay out only after the goal is met satisfy this rule by design.

The settlement consideration analysis. A release of legal claims is independent consideration. The settlement payment is therefore not "extra compensation" for prior services but consideration for the release. The agency's enabling statute supplied the power to manage its financial and business affairs.

The confidentiality issue. Daily Gazette Co. v. Withrow, 177 W. Va. 110 (1996), held that litigation settlements involving public bodies generally must be disclosed under the West Virginia FOIA. Exceptions exist. The AG declined to apply the rule without facts about specific exceptions.

Application. The performance incentives in the employment contract were valid because they were bargained-for prospective compensation, plus the agency had Rucker-type discretion. The settlement was valid because the release supplied new consideration. § 12-3-13 was not violated.

Citations

• W. Va. Const. art. VI, § 38
• W. Va. Code § 5-3-1 (AG written opinions)
• W. Va. Code § 12-3-13
• Daily Gazette Co. v. Withrow, 177 W. Va. 110, 350 S.E.2d 738 (1996)
• Harbert v. Harrison Cnty. Court, 129 W. Va. 54 (1946)
• State ex rel. Cooke v. Jarrell, 154 W. Va. 542 (1970)
• Springer v. Board of Education, 117 W. Va. 413 (1936)
• State ex rel. Goodwin v. Rogers, 158 W. Va. 1041 (1975)
• Delardas v. Cnty. Court of Monongalia Cnty., 155 W. Va. 776 (1972)
• Rucker v. Bd. of Supervisors of Pocahontas Cnty., 7 W. Va. 661 (1874)
• City of Omaha v. City of Elkhorn, 276 Neb. 70, 752 N.W.2d 137 (2008)
• 59 W. Va. Op. Att'y Gen. 86 (1981); 61 W. Va. Op. Att'y Gen. 13, 17, 29 (1985); 63 W. Va. Op. Att'y Gen. 37 (1990); 56 W. Va. Op. Att'y Gen. 198 (1975); 55 W. Va. Op. Att'y Gen. 168 (1973)
• Fla. Op. Att'y Gen. 2007-26

Source

• Landing page: https://ago.wv.gov/media/18116/download?inline
• Original PDF: https://ago.wv.gov/media/18116/download?inline

Original opinion text

State of West Virginia
Office of the Attorney General
Patrick Morrisey
Attorney General
(304) 558-2021
Fax (304) 558-0410

October 1, 2013

The Honorable Glen B. Gainer III
State Auditor
State Capitol Complex, Bldg. 1, Rm. W-100
Charleston, WV 25305

Dear Auditor Gainer,

You have asked for an Opinion of the Attorney General about whether state law allows a particular state governmental employer to pay an employee performance incentives and settlement remittances. This Opinion is being issued pursuant to West Virginia Code § 5-3-1, which provides that "the attorney general shall give written opinions and advice upon questions of law . . . whenever required to do so, in writing, by . . . the auditor[.]" To the extent this Opinion relies on facts, it is based solely on the factual assertions set forth in your correspondence with the Attorney General's Office.

Your letters raise two legal questions, each addressed in turn below:

(1) May the state governmental employer include performance incentives in its employee's contract?
(2) May the employer make payments to its former employee under a litigation settlement entered into at a later time?

Background

Your request centers on the propriety of two contracts between a particular state governmental employer and one of its former employees. The first contract is an agreement in which the employer hired the employee. Under this employment agreement, the state entity agreed to pay the employee a base salary for a set number of years, plus additional performance-based incentives. These incentives provide that the employer would pay the employee additional sums either if the employee completed certain specified tasks or if persons within the employee's area of responsibility achieved certain metrics of success. The employment agreement stated that if the employer terminated the employee for cause, the employee would not be entitled to any compensation beyond what the employee had already earned. But if the employer terminated the employee without cause, the employee would be entitled to the base salary for the full remaining time under the contract. The employment agreement purports to be confidential.

The second contract arose after the employment agreement. In this contract, the employee agreed to resign his employment and to release all claims the employee might have against the employer. In exchange, the employer agreed to pay the employee the base salary under the remainder of the contract term plus an additional amount. This settlement agreement also purports to be confidential.

In two recent letters, you wrote to the Office of Attorney General, following up on a series of unanswered Opinion requests from the past decade. The first letter attached a number of earlier requests that had asked whether various state governmental entities, from municipalities to counties to state agencies, may offer performance-based payments to public employees. Your most recent letter to us further requested an Opinion on several specific issues involved in this employee's contracts and asked several specific legal questions, including whether you must honor the confidentiality clauses in the two agreements.

We answer your legal questions below with the exception of your concerns regarding confidentiality. Although the general rule is that litigation settlement agreements involving a public body must be disclosed under the West Virginia Freedom of Information Act, see Syl. pt. 2, Daily Gazette Co., Inc. v. Withrow, 177 W. Va. 110, 350 S.E.2d 738 (1996), we lack sufficient facts to apply that rule to the specific contracts at issue. Without more information, we cannot determine whether an exception to the Act applies or other reasons exist that may bear on the issues of confidentiality. Accordingly, we have chosen in this letter not to disclose any specifics of the contracts or other information, including certain legal citations, that might identify the particular employer or employee.

Question One: May the state governmental employer include performance incentives in its employee's contract?

In your requests for an Opinion, you asked whether any state law prohibits performance incentives of the type in the employee's employment agreement. You focused specifically on Article VI, Section 38 of the West Virginia Constitution ("Section 38") and West Virginia Code § 12-3-13. Under Section 38, "[n]o extra compensation shall be granted or allowed to any public officer, agent, servant or contractor, after the services shall have been rendered or the contract made . . . [n]or shall the salary of any public officer be increased or diminished during his term of office." W. Va. Const. art. VI, § 38 (emphasis added). Separately, West Virginia Code § 12-3-13 provides that compensation may not be paid before services are rendered: "No money shall be drawn from the treasury to pay the salary of any officer or employee before his services have been rendered." W. Va. Code § 12-3-13.

Article VI, Section 38 of the West Virginia Constitution

For two independent reasons, the constitutional restriction does not bar the employment agreement in question. First, Section 38 is inapplicable here because the employee's contract contained a previously-bargained-for performance incentive, not a pure gratuity. A gratuity is an after-the-fact tip for good service. Gratuities often take the form of non-contract lump-sum payments to employees after the employees already rendered their services for predetermined salaries. 61 W. Va. Op. Att'y Gen. 29 (1985). Such payments run afoul of Section 38 because they increase an employee's compensation for a set amount of work after the terms of employment have been agreed upon and the work has been done.

Section 38 does not prohibit bargained-for increases in compensation that occur prior to the start of the work. For example, the legislature may increase compensation for judges, but may only do so at the start of new terms of office. Harbert v. Harrison Cnty. Court, 129 W. Va. 54, 71, 39 S.E.2d 177, 189 (1946). Similarly, this Office has determined that annual salary adjustments based on years of service do not constitute impermissible bonuses for purposes of Section 38. See 63 W. Va. Op. Att'y Gen. 37 (1990).

Nor does Section 38 forbid the State from granting contemporaneous salary increases to employees who are newly expected to perform additional services. State ex rel. Cooke v. Jarrell, 154 W. Va. 542, 547, 177 S.E.2d 214, 217 (1970); 55 W. Va. Op. Att'y Gen. 168 (1973); 61 W. Va. Op. Att'y Gen. 13 (1985); 56 W. Va. Op. Att'y Gen. 198 (1975). Extra compensation may generally be given whenever a position is modified such that new duties make the job "embrace a new field . . . beyond the scope or the range of the office as it formerly existed or functioned." Springer v. Board of Education, 117 W. Va. 413, 413, 185 S.E. 692, 694 (1936); State ex rel. Goodwin v. Rogers, 158 W. Va. 1041, 1055, 217 S.E.2d 65, 73 (1975). The duties must not be purely incidental, however. Thus, the West Virginia Supreme Court of Appeals has held that Section 38 barred the State from granting a pay raise when the employee's duties were expanded only by an incidental requirement to attend a new in-service training program. Delardas v. Cnty. Court of Monongalia Cnty., 155 W. Va. 776, 789, 186 S.E.2d 847, 856 (1972).

In light of these principles, this Office has previously opined that it is consistent with Section 38 for the State to include prospective performance incentives in employment contracts. Specifically, this Office previously determined that teachers cannot be paid a cash bonus for unused leave, where such a bonus was not a pre-negotiated part of the teachers' contracts prior to the start of employment for the school year. 59 W. Va. Op. Att'y Gen. 86 (1981). The Opinion found the pay-out objectionable because it "would be paid after the employee had performed the very services he had contracted to perform, and it would be paid solely for 'coming to work.'" Id. However, Section 38 would not preclude a contract that included an option for additional compensation if the employee met certain conditions, such as not taking any leave. Id. This Office suggested that "the potential constitutional objections may be curable at least as to prospective school years by inserting appropriate language into the standard employment contracts so that the incentive plan becomes, in effect, part of the contract before the services are rendered." Id.

That earlier Opinion comports with the plain text of Section 38. Significantly, Section 38 provides that "[n]o extra compensation shall be granted or allowed . . . after the services shall be rendered or the contract made." W. Va. Const. art. VI, § 38 (emphasis added). The highlighted phrase supports the notion that the provision is directed at non-contract payments and does not prohibit performance incentives included in a contract.

The Opinion is also consistent with the decision of the highest court in at least one other state that has a similar constitutional provision. Article III, § 19 of the Nebraska Constitution, like Section 38, provides that "[t]he Legislature shall never grant any extra compensation to any public officer, agent, or servant after the services have been rendered." The Supreme Court of Nebraska has interpreted this provision to allow bargained-for payments, even if contingent on unknown events. City of Omaha v. City of Elkhorn, 276 Neb. 70, 83, 752 N.W.2d 137, 147 (2008). "[W]hen the 'services' for which compensation is paid are rendered after the date on which the terms of compensation are established, the benefits awarded are not a gratuity." Id.

In accord with this Office's previous Opinion, we conclude that the performance incentives at issue here are allowable under Section 38. The employment agreement between the state employer and the employee established at the outset of a term of employment that the employee would be paid additional amounts based on future performance that went above and beyond the employee's regular duties. Those payments constitute previously-bargained-for performance incentives, not after-the-fact gratuities, and therefore are not objectionable for purposes of Section 38.

Second, Section 38 also does not apply to the employee's contract because the compensation was not set by statute or fixed by some other law. Our Supreme Court of Appeals has held that the constitutional ban on extra compensation "applies only to such salaries or compensation of public officers as have been definitely fixed or prescribed by law; either by the Constitution of the State or by statute made in pursuance thereof." Rucker v. Bd. of Supervisors of Pocahontas Cnty., 7 W. Va. 661, 663 (1874).

In this case, the employee's salary was not set by Constitution or statute and, therefore, Section 38 does not apply. Like many other state entities, the state employer in question is exempt from the Division of Personnel's rules, has the statutory authority to promulgate its own personnel rules, and is empowered to enter into personal contracts. Under the employer's own rules, it had complete discretion to set the compensation of the particular employee at issue by contract, as the employee was not subject to any sort of salary schedule. That discretion and the authority to enter into contracts put the contracted-for performance-based incentives at issue here beyond the reach of Section 38.

West Virginia Code § 12-3-13

We also conclude that West Virginia Code § 12-3-13 does not forbid the employment agreement at issue. That provision mandates that "[n]o money shall be drawn from the treasury to pay the salary of any officer or employee before his services have been rendered." W. Va. Code § 12-3-13. This means that a contract must make all payment contingent on actual performance of some stated services. A signing bonus, or other amount to be paid before an employee began and performed some work, would be unlawful. The arrangement here is consistent with the statutory restriction because the employer agreed to pay an incentive after the employee undertook a specific act or achieved a certain goal.

Question Two: May the employer make payments to its former employee under a litigation settlement entered into at a later time?

You also requested that this Office opine on the legality of a second contract that arose after the employment agreement. Based on the materials you have provided, this second contract resembles a litigation settlement. Under this agreement, the employer and the employee have agreed to release their legal claims against one another in exchange for consideration. The employer has agreed to pay the employee a certain sum, and the employee has agreed to resign and forgo any claims the employee might have had against the institution. The payments that the institution must make under the settlement agreement appear to match the employee's salary under the employment agreement, but there is no pay-out of any unearned performance incentives.

Based on what you have told us, the settlement agreement does not appear to contravene West Virginia law. The employer is expressly provided by statute the power to conduct its financial and business affairs, which would seem to include the authority to settle active and potential legal claims against it. Assuming that the settlement agreement is not invalid for other reasons, the agreement binds the employer to make payments in the future years as scheduled under the contract. Without additional facts, we do not address broader issues about the employer's power to obligate the State to make payments under future appropriations, but should you have further questions, please do not hesitate to contact this Office.

Sincerely,

Patrick Morrisey
Attorney General

Elbert Lin
Solicitor General

Christopher S. Dodrill
Assistant Attorney General