Several years ago, I wrote on this topic of overtime and bonus pay for nonexempt employees, and I continue to have clients ask about these matters.
Michele Harmon
This is super easy to understand if employers will take the time to review the Department of Labor’s (DOL) webpage, review the easy-to-read Fact Sheets, listen to your Human Resource (HR) professional, and consult with an employment lawyer when you do not believe your HR professional.
This month I’m reviewing the Wage and Hour Division’s Fact Sheet 56C: Bonuses under the Fair Labor Standards Act (FLSA).
What are discretionary bonuses?
They are excludable from the employee’s regular rate of pay. To be genuinely discretionary, and this is where I see the most mistakes made, the following three requirements must be met:
- The employer has the sole discretion until at or near the end of the period corresponding 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 that might cause an employee to expect such payments regularly.
Examples include bonuses that are not expected, such as:
- Bonuses for overcoming a challenging or stressful situation.
- Bonuses to employees who made unique or extraordinary efforts (when such are 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.
The takeaway is that these bonuses are not credited towards overtime compensation due under the FLSA. This is key to paying nonexempt employees correctly versus a non-discretionary bonus.
What is a non-discretionary bonus?
Non-discretionary bonuses are included in the regular pay rate unless they qualify as excludable under another statutory provision (see below).
Examples of non-discretionary bonuses that must be included in the regular rate include:
- Bonuses that are based on a predetermined formula, such as individual or group production bonuses.
- Bonuses for quality and accuracy of work.
- Bonuses that were announced to employees to induce them to work more efficiently.
- Attendance bonuses; and
- Safety bonuses (i.e., number of days without safety incidents).
Where attendance bonuses are concerned, if a person gets the bonus for a period of time, such as for a quarter, then payroll must go back and recalculate each employee’s overtime compensation for the period the bonus was earned in each 40-hour work week. Let that one sink in for a minute.
These bonuses are non-discretionary because the employees know about and expect the bonus. The fact that the employer has the option not to pay the promised bonus does not make the bonus discretionary.
What about gifts and payments for special occasions?
A Christmas bonus is a perfect example of this type of payment. Another is a reward for retention or tenure as an employee. A sign-on bonus may also be considered a gift.
In conclusion, bonuses are a pain for every employer and employee. Bonuses only work sometimes versus compensation that the employee can count on weekly, biweekly, semi-monthly, or monthly. The employees can also plan their annual tax payments.
For the employer, big or small, bonuses are difficult to administer and track. Bonuses cost time and money in payroll and HR, independent of the employer’s size.
This writer advocates against bonuses if you educate your employees in financial literacy so that your employees understand why dependable compensation is better than any form of bonus. Lastly, bonuses are all taxed. If the employee does not know the amount coming, they cannot plan their taxes adequately. Bonuses thus are a point of contention that employers might consider avoiding. Employers risk animosity from their employees who think their bonus needs to be increased, whether based on the employee’s own self-valuation or based on what the employee might know about their peers’ bonuses.
Remember, compensation is not private, and you cannot legally prevent your employees from discussing and comparing their compensation.
“Your employees are the heart of your organization.” Dr. Michele Harmon is a Human Resource professional, supporting clients in Texas and New Mexico that range in size from five to more than 3,000 employees. Email: micheleharmon1@gmail.com