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Who doesn’t like a bonus? The reasons are apparent. Employees will always take recognition for a job well done and some extra cash in their pocket. Employers will enjoy their current employees boosted morale and productivity. Also, they will be able to attract better quality talent in a tight labor market. But with all things business, there are always legal considerations to contemplate when offering a bonus program.

Most Common Mistake

The most common mistake companies make is not factoring bonuses into overtime calculations. According to the federal Fair Labor Standards Act (FLSA), there are two bonus categories: discretionary and non-discretionary.

  • Non-discretionary bonuses are tied to benchmarks such as production targets or hours worked and must be included in an employee’s regular rate of pay to determine overtime
  • Discretionary bonuses are not measured by, or dependent upon, hours worked, production, or efficiency (such as a “holiday bonus” typically given at a year’s end to recognize employees).

Example of Non-Discretionary Bonus 

You pay a $100 bonus quarterly to all personnel on the accounting team if they meet specific quarterly goals, including the hourly employees. Therefore, the additional $100 must be factored into hourly employees’ overtime rates. Given the complications and tracking required, it may be more beneficial to offer a one-time year-end bonus to all hourly employees of $400 instead. 

Avoid Wage Violation Lawsuits

Employees who feel they have been underpaid can bring a class-action lawsuit against your company for wage and hour violations. The lawsuits are expensive to defend, are rarely covered by insurance. They are becoming more prevalent as employees are better educated on their rights. A bonus plan should be carefully examined to ensure compliance with all federal and state laws. Employers can continue to offer competitive pay while remaining legally compliant by understanding these risks.

  • Ensure that the company has not agreed to pay a discretionary bonus in any offer letter or employee handbook
  • Re-examine the structure of all bonus programs to determine whether they could be considered non-discretionary
  • Identify the non-exempt employees who have been paid a non-discretionary bonus within the last three years
  • Determine how much overtime the identified non-exempt employees tend to work each workweek, if any (if non-exempt employees who are eligible for a non-discretionary bonus rarely work overtime, then the risk of non-compliance may be diminished)
  • Train the employees responsible for payroll on how to properly factor in non-discretionary bonus pay when calculating overtime pay
  • Consider limiting non-discretionary bonuses to exempt employees who are generally not entitled to overtime
  • Consider alternatives to non-discretionary bonuses, such as, a year-end bonus that is not tied to production or hourly benchmarks

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