Every year during the holiday season we are encouraged to focus on giving, whether it be giving thanks, giving to the needy, or giving gifts. For many employers, the holidays present the ideal time to give employees additional compensation in the form of a bonus in lieu of yet another promotional tchotchke. After all, monetary bonuses are a great way to express appreciation for the contributions employees make to the success of an organization, not to mention a proven method for boosting employee morale and productivity. However, when deciding and awarding bonuses, employers are well-advised to keep their overtime pay obligations under the Fair Labor Standards Act (“FLSA”) at the forefront of any bonus decision. This advice is especially pertinent to employers who either plan to or have already awarded holiday bonuses to their non-exempt employees. What follows is some brief advice employers should apply to their non-exempt employee bonus award policies to ensure ongoing compliance with the FLSA.

While bonuses may be awarded for any number of reasons, unless those bonuses fall into an exception outlined under the FLSA, they must be factored into the base wage on which the overtime premium is calculated for non-exempt employees. For overtime payment purposes, the FLSA distinguishes between discretionary and non-discretionary bonuses. Non-discretionary bonuses include awards paid to employees for attendance, or who reach certain productivity or efficiency metrics, and must be included as part of an employee’s regular base rate for overtime wage calculation purposes. Meanwhile, truly discretionary bonuses, or bonuses given as gifts, have no bearing whatsoever on the overtime compensation due a non-exempt employee recipient.

Therefore, if a bonus, no matter how humble, is awarded to a non-exempt employee and does not qualify as a discretionary bonus or a gift, the employer is obligated under the FLSA to go back and apportion the amount of the bonus over the workweeks during which it was earned so that the amount is properly incorporated into the employee’s regular rate of pay for those workweeks. If the employee recipient worked in excess of 40 hours in any of the applicable weeks, the employer must then pay any additional overtime wage due the employee based on the higher base rate caused by the award of the non-discretionary bonus.

Based on the above, it is evident how easily a well-intentioned holiday bonus can shift into an FLSA compliance nightmare in the form of a Department of Labor investigation, or worse, a class action claim for unpaid overtime wages. Discretionary bonuses, then, can be the ideal mechanism for expressing gratitude or good will to non-exempt employees. To make certain that a bonus is deemed discretionary, employers should make sure the following requirements are met:

  1. the employer must have complete discretion as to the fact the bonus is paid;
  2. the employer must have complete discretion as to the amount to be paid;
  3. that discretion must be maintained until a time close to the end of the period covered by the bonus payment; and
  4. the bonus must not be given incident to any existing agreement or promise that would cause the employees to expect bonuses. Put simply, the employee must have no expectation of any bonus in order to completely avoid having to make an upward adjustment to the base on which overtime wages are calculated. This means the employer should refrain from announcing even the possibility of holiday bonuses, and should avoid using the potentiality of such a bonus as a way to incentivize employee productivity or efficiency.

If non-discretionary bonuses are an employer’s preference, that employer should be careful to include the amount of the bonus in calculating non-exempt employees’ regular rate of pay during the period covered by the bonus, and adjust any overtime wage payments accordingly.