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At the end of the calendar year, many employers grant bonuses to their employees. Most employers know that gifts above a nominal amount are subject to withholding tax, but employers may overlook the fact that payment of certain bonuses may also result in additional overtime pay for hourly (non-exempt) employees.
The Department of Labor makes a distinction be- tween a discretionary bonus and a promised bonus.
If a bonus is paid based upon a contractual agreement to do so, is promised to employees when they are hired, or is provided to employees to induce additional productivity or quality of work, then the Department of Labor requires the amount of the bonus to be included in calculating the employee’s regular rate of pay. Promised bonuses include attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, and others. What does this mean for overtime? It means that the bonus payments must be included in the overtime calculation for hourly employees who work more than 40 hours in a work week for the period covered by the bonus. Such employees are then entitled to an additional payroll check in the amount of the difference between the overtime rate paid and the recalculated rate that includes the bonus.
Discretionary bonuses, how- ever, are not subject to such treatment. In order for a
bonus payment to qualify as a discretionary bonus, the employer must retain discretion both as to the fact of payment and as to the amount of payment until the decision is actually made to pay the bonus. In other words, the employee must have no right, expressed or implied, to any amount of the bonus in order for it not to be treated as regular wages under the Act.
Employers need to be aware of the distinction between promised and discretionary bonuses when making the decision as to when and under what circumstances to award bonuses to their employees. If you have any questions about this issue, or any other questions about how the law of the workplace may affect you, please contact your Petrie & Stocking attorney.
Attorney Roger Pettit
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