Holiday Bonuses: Pass The Bucks...Please

(Published November 17, 2008)

 

Reprinted from PERSONNEL LEGAL ALERT, a widely read employment law newsletter that keeps HR executives up-to-date on the latest court cases, legal trends, government regulations, and federal legislation that affect the policies you write and procedures you administer.  Click here to get more information, or sign up for a risk-free subscription. 

Good, bad, or indifferent economy, there are valid reasons — mostly sustaining employees’ morale — to pay bonuses during the holiday season.  If paying bonuses are in your company’s future, here’s what you need to consider. 

BONUS ETIQUETTE

 

If employees received bonuses in the past, they may be expecting them again this year.  While it’s impossible to stop the chatter, you can remind employees that bonus information, like pay information, is confidential and should be kept that way.  Bonus blunder: Confidentiality is the goal, but you shouldn’t put an outright ban on discussions.  Reason: Under the National Labor Relations Act, employees (even non-union employees) have the right to discuss their working conditions, which includes their pay.

Likewise, employees should understand the criteria for bonuses.  Bonus blunder: Don’t assume that employees have known all along how their bonuses will be measured.  This is critical if bonuses are based on employees’ productivity.  Informing employees of how their bonuses are measured can head off confrontations with employees who haven’t earned a bonus or those who think they should have received more than they did. 

 Finally, to avoid the hurt feelings of employees who didn’t qualify for a bonus, managers should be reminded to be discreet when distributing bonuses.  To take managers out of the distribution equation altogether, you can ask Payroll to include bonus checks in the same envelope as regular paychecks or combine them with employees’ regular pay in one check.

CLASSIFYING BONUSES

The company should be very clear about what type of bonus it’s paying.  If bonuses are paid to reward employees’ productivity, the Fair Labor Standards Act (FLSA) requires that you include them in non-exempts’ regular rates of pay when figuring their overtime rates.  Exception: Discretionary bonuses need not be included in the regular rate calculation.  Under the FLSA, a bonus is discretionary if:

 • You retain absolute control over whether bonuses will be paid at all and the amount of the payments until quite close to the end of the bonus period.  Bonus blunder: Don’t base discretionary bonuses on the financial health of the company, since it could be perceived as giving up control over the amount of the bonuses. 

 • You don’t make any promises beforehand to pay bonuses.  Bonus blunder: Don’t make any announcements regarding bonuses, or feed employees’ expectations that bonuses will be forthcoming this year, simply because they were paid last year. 

On the other hand, bonuses that are paid during the holiday season, or on other special occasions, are gifts that are excluded from the regular rate calculation.  The fact that bonuses are paid regularly, and that they vary depending on employees’ pay, isn’t relevant.  For example, a holiday bonus equal to two weeks’ pay, plus an additional week’s pay for every five years of service, is an excludable holiday bonus.  Be careful: If the amount of the gift is so substantial that employees come to count on it as part of their regular pay, it’s not a gift and must be included in the regular rate.  Snag: The FLSA doesn’t define substantial. 

Classifying bonuses is also key under the Family and Medical Leave Act (FMLA).  An employee out on FMLA leave will qualify for a holiday bonus, if they met all the requirements for payment before FMLA leave began.  If an employee is on FMLA leave during any part of the period for which a discretionary or non-discretionary productivity-based bonus will be based, they are entitled to the same consideration as other employees on paid or unpaid leave.  If the bonus is based on yearly earnings, for example, it may be prorated by the amount of lost productivity occasioned by the FMLA leave. 

FIGURING AND PAYING BONUSES

Non-discretionary productivity-based bonuses that aren’t paid during the week they were earned must be allocated back over all the weeks during which they were earned.  This retroactive calculation increases both employees’ regular rate calculations and their overtime rates.  FLSA break: If bonuses will be based on employees’ 2008 earnings, but not paid until 2009, you won’t have to include them in the regular rate calculations when figuring next year’s bonus. 

To spare Payroll the nightmare of recalculating employees’ regular rates and overtime rates for an entire year, you can base bonuses on a percentage of employees’ total straight-time and overtime pay.  The key to this strategy is to pick a manageable cut-off date, say, all pay earned through the end of November.

 

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