As we head into the holiday season, some employers might be thinking about annual or holiday bonus payments for their employees. Others may already have a bonus structure in place, perhaps for hitting certain production goals or other quality measures. It might seem like a straightforward and simple task to add bonus payments to employees’ pay, but you may be surprised to learn that this is not always the case. While most people might be thinking that a bonus is a bonus, it’s important to understand that not all bonus payments are created equal.
The two terms of classifying bonuses that every payroll team should be familiar with are discretionary and non-discretionary. Depending on the type of bonus that is being paid, different rules can apply, and incorrect handling of a bonus can lead to non-compliance with the Department of Labor’s Fair Labor Standards Act (FLSA). In order to treat each bonus payment appropriately, it needs to be determined whether the payment is discretionary or non-discretionary.
Discretionary bonuses are just that: discretionary. Typically, these are paid out at the employer’s discretion and aren’t based on the employee’s performance or productivity. Discretionary bonuses can be issued for any amount of the employer’s choosing and can be paid at any time. These types of bonuses may also be referred to as unearned bonuses. A holiday bonus is a prime example of a discretionary or unearned bonus.
Non-discretionary bonuses, on the other hand, are bonuses that the employer has agreed to pay to the employee(s), for meeting specific performance measures, individual or department goals, or as part of a defined and agreed-upon incentive plan. In a nutshell, these are bonuses that an employer has promised to pay, as long as the employee meets certain conditions. As you may have guessed, these types of payments are sometimes referred to as earned bonuses.
Bonus Impact on Calculating Overtime Rates
If a bonus payment has been deemed non-discretionary, the amount must be factored into the employee’s regular rate of pay for overtime calculation purposes. In order to determine the employee’s regular rate of pay, all non-discretionary payments earned in a period should be added to the employee’s hourly wages for the same period. Dividing this figure by the total hours worked will give the employee’s regular rate of pay for the period. This is the rate that should be used to determine the amount of overtime pay that is owed. The FLSA provides more detail as well as some examples here.
Still Have Questions? Consult a Payroll Service Company
Bonuses can be an effective way to motivate and incentivize employees and help the company reach its goals. Just remember, when paying out earned or non-discretionary bonuses, this can affect an employee’s regular rate of pay and their rates for any overtime pay during the period. Correctly determining these rates are critical to FLSA compliance and can help you avoid costly penalties. The experts at Valor Payroll Solutions can help ensure payroll compliance and help you take care of your employees. Contact us today!