31 October 2023

Employee Bonuses: Keeping an Employee “Treat” From Becoming An Employer “Trick”

As the weather starts to change, you might be one of the employers keeping an eye on key performance indicators to determine how 2023 is shaping up for your company. You might even be thinking, “maybe we’ll issue a bonus if the company reaches certain financial goals.” What a “treat” that would be for your employees!

But, like all things compensation, the Fair Labor Standards Act has something to say about non-exempt employee bonuses. Getting this right will help you not get “tricked” into a FLSA violation.

The federal FLSA requires that most employees in the U.S. be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. Under the FLSA, unless otherwise “excluded,” all compensation for hours worked, services rendered, or performance is included in the regular rate of pay.

The Act provides an exhaustive list of payments that may be excluded from the regular rate of pay. Specifically, 29 U.S.C. Sect. 207(e)(1) and (3) contain statutory provisions that address the excludability of certain types of payments- such as bonuses- from the regular rate. These include

  • Gifts and payments in the nature of gifts on special occasions (such as holidays, service awards, or other special occasion) provided that the amount of the gift/payment is not measured by or dependent on hours worked, production, or efficiency.
  • Payment for occasional periods when no work is performed (like vacation time, holiday time, etc.).
  • Discretionary bonuses: A bonus is discretionary only if:
    • Both the fact the bonus payment is to be made and the amount of the bonus payment are at the sole discretion of the employer at or near the end of the period; and
    • The bonus payment is not made according to any prior contract, agreement, pr promise causing an employee to expect such payments regularly.

Examples of some common bonuses that may be excludable discretionary bonuses 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

The label an employer sticks on a bonus is not going to conclusively determine whether the bonus is discretionary. Rather, the facts and circumstances surrounding the bonus are what is going to win the day. Generally, the more the employer determines after the fact that there is reason for awarding a bonus (for which the employer has not previously announced the amount, requirements, or timing of), the more the bonus looks like a discretionary bonus and would otherwise be excluded from the calculation of the regular rate.

So, what happens if a bonus is not excludable and must be included in the regular rate?  Well, the bonus amount must be factored into overtime pay:

  • The employer will need to determine the amount of the bonus attributable to specific workweeks
  • Add the amount of the bonus that is attributable to any individual workweek to the employee’s wages for that workweek
  • Divide the total wages (including the workweek bonus amount) by the total number of hours worked for that week. This is your regular rate of pay.
  • Then, multiple the regular rate by 1.5 to get the overtime rate.

But, what if the bonus earnings cannot be identified with particular workweeks? The FLSA says that an employer must adopt “some other reasonable method of allocation must be adopted.” This could include assuming that the employee earned an an equal amount of bonus each week of the period to which the bonus relates, or that the employee earned an equal amount of the bonus each hour of the period to which the bonus relates.

Why is it important to get this right? If the employer does not determine the regular rate properly, calculation of an employee’s overtime pay will be incorrect, leading to potential liability. Liability includes payment of the unpaid overtime, and potential penalties (like double damages).

And that’s no April Fools (ok . .. now I’m mixing my holiday metaphors!)


Contact the author Sandy Andre.