Did you know that a well-intentioned holiday bonus can turn onto a wage compliance headache?

The holidays are time to give hard-working employees a bonus. Monetary bonuses are a great way to express appreciation for contributions made by employees. Bonuses can boost employee morale and productivity. However, employers need to consider the implication of bonuses on the overtime rate and ensure compliance with the Fair Labor Standards Act (FLSA). This is especially relevant to employers who award holiday bonuses to their non-exempt employees.

Unless a bonus meets the definition of a “discretionary” bonus, bonuses should be considered non-discretionary. As such, the additional money must be factored into the base wage on which the overtime premium is calculated.

Discretionary bonuses might be a better mechanism for employers to express gratitude or goodwill to non-exempt employees.

A discretionary bonus must meet the following requirements:

  • The employer has complete discretion as to whether the bonus is paid;
  • The employer has complete discretion as to the amount to be paid;
  • The bonus must not be given incident to any existing agreement or promise that would cause the employees to expect bonuses.

Put simply, to qualify as a truly discretionary bonus, the employee must have no expectation of holiday pay. The employer should refrain from announcing even the possibility of holiday bonuses and should avoid using it to incentivize employee productivity or efficiency.

Non-discretionary bonuses include awards paid for attendance, or for reaching business goals. These non-discretionary bonuses must be included in an employee’s regular base rate when calculating overtime wage rate. Discretionary bonuses include a gift award without any performance toes. Those are rare in the business world. If your bonus is truly discretionary, the monetary award has no bearing whatsoever on overtime compensation.

How to include non-discretionary bonus into base pay?

A non-discretionary bonus, no matter how small, needs to be apportioned over the period during which it was earned. If a bonus is paid for annual performance, the amount has to be equally spread over 52 weeks. If it’s a monthly bonus, the same goes for the month in question.

Add the bonus to the employee’s pay for those workweeks to determine the regular rate of pay. If overtime is worked over the period of the bonus, this new regular rate of pay determined the basis for overtime calculations.

Contact me if you need assistance on employee pay or consider the exempt / non-exempt classification of your jobs.