As the holidays approach, many employers are hitting company goals and checking them twice as they prepare to dole out holiday cheer with year-end bonuses. While employees may be excited to unwrap these gifts, employers must ensure they are not running afoul of the Fair Labor Standards Act and ending up on the Department of Labor’s naughty list. In this article, we will address some of the common pitfalls associated with year-end bonuses to have you jingle bell rockin’.

Unwrapping Discretionary vs. Non-Discretionary Bonuses

Imagine announcing a bonus program in June that guarantees a $1,000 bonus on December 25 if employees hit a production goal. This is what we call a non-discretionary bonus because both the fact and amount of the bonus is known to employees ahead of time.

Now, imagine an employee wakes up Christmas morning, heads downstairs, and finds a huge check under the tree for an unexpected year-end bonus. This would be a discretionary bonus because the employer had total discretion to determine whether the bonus would be paid and the amount of this bonus.

Although you can take pride in spreading holiday cheer, you must be sure to include non-discretionary bonuses into the regular rate of pay for overtime calculations for non-exempt employees. Discretionary bonuses, on the other hand, are not included in the regular rate of pay.

Stocking Stuffers

Alternatively, you may gift employees a holiday ham, company-branded pajamas, or a gallon of eggnog. Similar to a discretionary bonus, the value of these gifts need not be calculated in the regular rate of pay as long as they are not given out based on hours worked, production, or efficiency.

How the Grinch Stole Bonuses?

Employees may decide to ring in the New Year with a new employer. But what happens if they leave before a year-end bonus is paid out?

In many states, employers may impose eligibility restrictions on when a bonus is “earned.” For example, you may require an employee be employed on the date the bonus is paid out, otherwise the bonus if forfeited. Or maybe the employee left before the deal was closed and didn’t earn the bonus.

In these instances, you should clearly define in the bonus policy when the bonus was “earned” and also review state laws to determine if a “must be present on pay-out date” requirement is enforceable.

Please reach out to Paul Bittner, Phillip Jones or any member of the Ice Miller Workplace Solutions Practice Group if you have questions regarding bonus plans.  And you can always call Paul if you want to talk about college football or NHL hockey.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.