Holiday Bonuses and How it Can Increase Overtime Pay

INCLUDED IN OT CALCULATION OR NOT?

The holiday season is here and that means work parties, too many sweets, gift exchanges, and an employee favorite – bonuses.  While the timing and amount of bonuses varies from business to business, the same question always seems to arise this time of year: do I have to include the amount of my non-exempt employee’s bonus in that employee’s overtime regular rate of pay? While it would be great if the answer to this question was a simple “yes” or “no,” it unfortunately is a “maybe” and requires the employer to consider a number of factors to make an ultimate determination.

As a rule of thumb, most bonuses for non-exempt employees must be included as wages when calculating the regular rate of pay for overtime.  Unless the bonus falls under an exclusion, then it does not factor in to the regular rate of pay for overtime computation. 

Christmas or holiday bonuses that are truly given to employees as gifts or at the employer’s discretion are an exclusion to the general rule and do not need to be included in the regular rate of pay for purposes of computing overtime pay (at least not under federal law).  These discretionary bonuses cannot be dependent on hours worked, production or efficiency and they cannot be so substantial in amount that employees would consider the bonus part of wages for which they work.  Discretionary bonuses can vary from employee to employee due to length of service. However, a bonus does not fall into the discretionary category if it is paid pursuant to some contract between the employee and the business.  Further, a discretionary bonus can become a non-discretionary bonus subject to overtime implications if the discretionary bonus is provided to the same employees for the same amount year in and year out.  If that is the case, employees begin to expect this bonus and it is no longer considered discretionary. 

NON-DISCRETIONARY BONUSES

Non-discretionary bonuses, on the other hand, must be included in the regular rate of pay for overtime, are often known to employees well in advance of payment, and are given as an encouragement for greater work efficiency or for retention purposes.  Examples of bonuses that are normally included in the regular rate are:

  • Production bonuses;

  • Bonuses that are paid for performing work in less than an established standard time;

  • Bonuses that are paid when certain types of merchandise are sold through an employee’s effort;

  • Cost-of-living bonuses;

  • Attendance bonuses;

  • Retention bonuses; and

  • Bonuses paid as an incentive to attract employees to a certain job or jobsite.

GIFT CARDS = CASH?

Many employees forget that even if they are not giving their employees cash, they still must include any non-discretionary cash equivalent bonus in the regular rate of pay.  The government considers the cash equivalent of a non-discretionary bonus as the amount that should be included in the regular rate of pay.  Even if you decide to provide gifts cards instead of cash as a bonus, the cash equivalent of that gift card must be determined and included in the employee’s overtime computation.

While there are also some tax implications as to bonuses, it is important that when you are discussing if you should give your employees a holiday bonus, you make sure to consider whether that bonus will be discretionary or non-discretionary.  Both categories have certain expectations that must be followed to stay compliant with the federal labor laws.   

If you have any questions regarding holiday bonuses you are giving your employees or if you have any other questions regarding information addressed in this tip, please contact your Thompson Coe attorney at (651) 389-5000 or at myHRgenius@thompsoncoe.com.  You can also find additional information and tips for your company and HR professionals at https://thehrgenius.com/

 
 

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