Beware Of The Consequences Of Bonuses
By Evelyn P. Schonberg
It’s hard to believe that another year is coming to an end. Although bonuses can be distributed at any time, it is at this time of the year that many businesses begin to confront the issue of year-end bonuses. In determining what, if any, bonuses will be distributed, all businesses must keep in mind the laws regulating bonuses for non-exempt, or hourly, employees. The following information is relevant for bonuses distributed at any time during the year.
In general, bonuses are additional payments that employees may receive over and above their ordinary regular earnings. In some instances the bonus payments are in the nature of gifts from the employer while in others the payments are so intertwined with the employee’s regular compensation that they are a part of it.
Employers must carefully analyze bonus payments under the provisions of the federal law known as the Fair Labor Standards Act (FLSA), which requires the inclusion of certain types in the employee’s total compensation and permits the exclusion of others. If the bonus payment is of the type that is required to be included in the employee’s total compensation, it will cause an increase in the regular hourly rate of pay and a resulting increase in total compensation during workweeks in which overtime hours are worked.
Generally, whether or not a bonus must be taken into consideration when figuring an employee's overtime pay under the FLSA depends upon its purpose and its nature. There are two types of bonuses under the FLSA. The first type is bonuses that are designed to encourage increased efforts on the part of employees. These bonuses must be included in overtime pay calculations. Examples include attendance bonuses, production bonuses ( both individual and group), bonuses for quality and accuracy of work, efficiency bonuses, bonuses for the highest number of overtime hours worked, and length-of-service bonuses.
The second type of bonus includes rewards for past services rendered by employees which are not devised until after the services have been rendered. These bonuses may be excluded from overtime pay calculations. Examples include Christmas bonuses, gift bonuses, bonuses wholly within the employer's discretion, profit-sharing bonuses paid pursuant to profit-sharing plans and trusts, and bonuses based on a percent of an employee's total wages.
In order to be discretionary, an end-of-the-year bonus must meet four specific conditions to justify an exclusion from overtime payments:
- The employer must retain discretion as to payment. This condition is not met where an employer announces in June that it intends to pay a bonus in December.
- The employer must retain discretion as to amount. Where employees are told they will receive a monthly bonus computed on the basis of 1 cent for each item sold whenever company finances permit, the employer has abandoned discretion with regard to the amount of the bonus.
- The employer must retain discretion with regard to the bonus until near the end of the period that it covers. Accordingly, if an employer decides to give its employees a year-end bonus, it should not be announced until the end of the year.
- The bonus must not be paid pursuant to any prior contract, agreement or promise. If a contract, agreement or promise exists, it will be presumed that the employer announced the bonus to employees in advance in order to obtain the desired results.
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