For the summer, I am changing things up. We all need a change of pace.
Michele Harmon
DEAR HR LADY: I am uncertain whether a bonus will allow me to keep my good hourly/non-exempt employees. Will it motivate my employees to work harder and smarter as well? What legal hurdles do I need to be aware of before paying a bonus?
DEAR UNCERTAIN: Bonuses have mixed results. Spot bonuses and individual incentive bonuses can motivate your employees to do a good job, especially when you cannot give them a raise in uncertain times. Ensure that you are rewarding the right set of behaviors for actions above and beyond when you provide a bonus. Bonuses lose their value if misused.
Often providing a bonus to keep an employee is a desperate act triggered by the realization that managers did not do the right thing at the right time. They are guilty of short-term thinking. By forecasting and managing employees well, clear goals and objectives create an environment where slow, steady personal and business growth will yield a higher return on your investment and loyalty.
Of course, the cons of a bonus are possible underestimated weekly compensation due to Department of Labor (DOL) issues for hourly/non-exempt employees. If you give a nondiscretionary bonus to an hourly/non-exempt employee, you will have to recalculate their pay for that week, including their overtime. When you gave them the bonus, you changed that week’s compensation.
Your controller needs to do some forecasting to estimate your projected revenue so you have an idea of whether you can give raises for performance. Why risk a mistake on their pay? Why not give them a raise? Did you know that you can reduce an employee’s pay by less than 20 percent without legal consequences? The Texas Workforce Commissions website explains issues around pay cuts. Reductions in the pay rate are legal but should never be retroactive. Remember that pay cuts of 20 percent or more may give an employee good cause connected with the work to quit and qualify for unemployment benefits. Notice of any changes in the pay rate should always be in writing, for the company’s own protection, in order to minimize disputes over the rate of pay. Make sure you read more about cutting hours and pay as well as cutting pay for disciplinary reasons.
The impact of a bonus can also have unexpected results for your employees. If they are planners, they may have planned on being in a particular tax bracket, and the bonus pushed them up a level. If you give them a raise, then they can do their forecasting.
We have a massive issue concerning the lack of financial literacy in the oil patch. Are you not exhausted with the choices many of your employees make in our boom or bust economy? In a boom, they will buy a fancy new truck versus holding on to their old truck. They fail to save and instead spend like there is no tomorrow, but tomorrow always comes. The money burns a hole in their pockets. Lead, and stop the madness for your employees’ sakes. In the long term, they will appreciate a raise.
If you are still going to provide a bonus, know the law. Before you give an hourly/non-exempt employee(s) a bonus, make sure you understand the difference between a discretionary bonus and a nondiscretionary bonus. Offering a bonus for specific predetermined performance measures, and the employees are aware of this potential bonus, is not a discretionary bonus. The DOL is circling. You may win a battle or two but will lose the war. A complaint to the DOL will cost you a considerable amount of time and money.
Remember, For every action, there is an equal and opposite reaction, and of course, do not forget, no good deed goes unpunished.
From the DOL’s Fact Sheet #56C:
Discretionary Bonuses
Discretionary bonuses are excludable from the regular rate of pay. A bonus is discretionary only if all the statutory requirements are met:
The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
The bonus payment is not made according to any prior contract, agreement, or promise, causing an employee to expect such payments regularly.
Examples of some common bonuses that may be excludable discretionary bonuses if they meet the statutory requirements include:
Bonuses for overcoming a challenging or stressful situation;
Bonuses to employees who made unique or extraordinary efforts not awarded according to pre-established criteria;
Employee-of-the-month bonuses;
Severance bonuses; and
Referral bonuses to employees not primarily engaged in recruiting activities (subject to additional criteria). Referral bonuses may be discretionary, provided the following criteria are met: (1) employee participation is strictly voluntary; (2) the employee’s recruitment efforts do not involve significant time; and (3) the activity is limited to after-hours solicitation done only among friends, relatives, neighbors, and acquaintances as part of the employee’s social affairs.
The label assigned to the bonus and the reason for the extra compensation do not conclusively determine whether the payment is discretionary. While a bonus may be labeled discretionary, if it does not comply with the statute’s provisions, then the bonus is not an excludable discretionary bonus. The determination must be made on a case-by-case basis, depending on the specific circumstances.
A discretionary bonus may not be credited towards overtime compensation due under the FLSA.
Nondiscretionary Bonuses
A nondiscretionary bonus is a bonus that fails to meet the statutory requirements of a discretionary bonus.
Nondiscretionary bonuses are included in the regular rate of pay unless they qualify as excludable under another statutory provision (see below). Examples of nondiscretionary bonuses that must be included in the regular rate include:
Bonuses based on a predetermined formula, such as individual or group production bonuses;
Bonuses for quality and accuracy of work;
Bonuses announced to employees to induce them to work more efficiently;
Attendance bonuses; and
Safety bonuses (i.e., number of days without safety incidents).
Such bonuses are nondiscretionary because the employees know about and expect the bonus. The understanding of how an employee earns one may lead to an expectation to receive the bonus regularly. The fact that the employer has the option not to pay the promised bonus does not make the bonus discretionary.
Gifts and payments in the nature of gifts on special occasions
Sums paid as gifts and payments in the nature of gifts made on holidays or on other special occasions as a reward for service may be excluded from the regular rate, provided the amounts of the gifts (or payments) are not measured by or dependent on hours worked, production, or efficiency.
Certain longevity bonuses are excludable from the regular rate as gifts when given as a reward for service or tenure, and provided the bonus payments are not made pursuant to a collective bargaining agreement or a city ordinance or policy.
Like all excludable gifts, longevity or sign-on bonus is an excludable gift only if the bonus payment is not paid pursuant to a contract and is not so substantial that it can be assumed that employees consider it a part of the wages for which they work.
Sign-on bonuses given to employees with or without clawback provisions may be excluded as gifts or maybe excluded under 29 USC § 207(e)(2) as other payments that are not compensation for hours of employment or otherwise tied to quality or quantity of work performed. However, sign-on bonuses paid pursuant to a CBA, ordinance, or policy with a clawback provision may not be excluded as a gift and must be included in the regular rate.