Unwrapping Holiday Bonuses: Employer Tricks or Employee Treats? A Review of the Regulations

With the tax season underway, employers and employees alike throughout the nation are reviewing their financial records. One piece of financial information that pertains to them both are holiday bonuses (given or received) during the prior year.

Under the Fair Labor Standards Act (“FLSA”), non-exempt employees are entitled to overtime pay at a rate of one and a half times their regular pay rate.[1] For example, a non-exempt employee who earns $10 an hour as regular pay would earn $15 per overtime hour worked during the year. Now assume that this same employee received a $1,000 year-end bonus. If this money were factored into calculating the employee’s regular pay rate, it would increase the overtime wages owed. For example, over 52 weeks of working 40 hours per week, $1,000 is equivalent to earning an extra $0.48 per hour, for a total of $10.48 per hour, which would raise the hourly overtime rate to $15.72. While seemingly insignificant, if this non-exempt employee worked 500 overtime hours during the year, the additional $0.72 per overtime hour would equate to $360 owed for the year! So, after giving the non-exempt employee a generous $1,000 year-end bonus, should the employer then be required to further compensate the employee with an additional $360? A review of the federal regulations helps answer this question.

According to the federal regulations, employers’ “payments [to employees] in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency” do not need to be factored into non-exempt employees’ regular pay rate.[2] Additionally, “the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment is geared to wages and hours during the bonus period and is no longer . . . in the nature of a gift.”[3] Furthermore, bonuses paid to employees in recognition of services performed are not factored into a calculation of the regular pay rate if “both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.”[4]

In sum, the regulations establish that if the decision to give a holiday bonus, as well as the amount of the bonus, is solely up to the employer’s discretion, and the payment is made in the nature of a gift rewarding services performed, then the payment need not be included in the employee’s regular pay rate. However, if the payment is extremely large, or is made pursuant to a promise or contract, then it will not be deemed in the nature of a gift, and must be calculated into the employee’s regular (and overtime) rates.

Discretionary vs. Non-Discretionary Bonus

A holiday bonus is generally deemed provided at the discretion of the employer. This is especially the case so as long as the bonus’s dollar amount is not directly dependent on the employee’s production, efficiency, or total number of hours worked.[5] For example, the Department of Labor recently opined that where an employer conditions giving employee bonuses on whether the company surpasses certain financial benchmarks, or the bonuses are used to induce employees to work rapidly, efficiently, or more accurately, the bonuses are considered incentives for sustained productive work, rather than discretionary acts by the employer, and are thus included in the employees’ regular pay rate.[6] Similarly, where an employer informs his employees “in January that he intends to pay them a bonus in June,” such payment cannot be deemed discretionary.[7]

Purpose of the Bonus

Employers who decide to distribute holiday bonuses must determine the underlying purpose of the bonus. Based on the above regulations, it is likely that even a relatively mundane bonus, such as a gift card to a local store, may be considered a non-discretionary form of payment if it is given for work performance as opposed to holiday cheer. In that case, the employer would need to pay the non-exempt employee an increased hourly overtime rate. It is for this reason that employers should be well-versed with these regulations, as the slightest mistake may inadvertently cost them the largest of sums in unanticipated unpaid overtime wages.

If you or your company would like more information regarding holiday bonuses or employment law, contact Thomas B. Wassel at twassel@cullenanddykman.com or via his direct line at  516-357-3868.

Special thanks to Melissa Cefalu, a law student at Maurice A. Deane School of Law, and Scott Brenner, a law clerk at Cullen and Dykman, for their assistance with this post.