‘Twas the eve of the holidays and all through the plant, There was hustle and bustle from all plus an ant. The boss was pondering -- What should I offer? A holiday bonus, perhaps? Is there enough in the coffer? A bonus sounds good -- could it be any trouble? Our employees will love it; they may even work double. There must be a catch, else why this ol’ rhyme? You must understand -- it may affect overtime.
No employer wants to be a Grinch this holiday season, but every employer should be aware of how Christmas and other end-of-year bonuses can affect overtime. If you decide to give a bonus this holiday season, the manner in which it's announced and calculated could affect whether you also have to go back and recalculate your nonexempt employees' overtime pay. This probably isn't the thank-you that you wanted for your holiday bonus.
General rule on bonuses
As our faithful readers are aware, nonexempt private-sector employees are entitled to be paid overtime for all hours worked over 40 in a workweek. The Fair Labor Standards Act (FLSA) requires that you base your overtime calculations on the employee's “regular rate.” This is typically her hourly wage rate adjusted to reflect certain specific forms of additional compensation you may provide in exchange for her services.
Bonuses that are provided as a direct or indirect incentive for employees to work harder or more efficiently are one type of additional compensation that must be included in an employee's regular rate. These types of bonuses include those based on such things as group or individual production, attendance, and/or work quality or accuracy. Incorporating these bonuses into your employee's regular rate can be tricky, especially when the bonus is intended to compensate the employee for work that was completed over multiple workweeks.
According to the U.S. Department of Labor (DOL), the bonus should be allocated in a way that's consistent with the manner in which it was earned. For example, if the bonus is intended to reward the employee for performance on a particular date (for example, a particularly large sale), then it probably would be appropriate to allocate the entire bonus amount to the workweek in which the sale occurred. If, however, the bonus was meant to reward outstanding performance over a longer period, such as a quarter, then it could be spread out evenly among all the workweeks in the quarter.
When bonuses are allocated to a workweek in the past, you're faced with the possibility of not having paid the correct amount of overtime for that week. Unless you anticipated the value of the bonus and added the appropriate amount to your employee's regular rate at the time, her overtime pay was computed based on a regular rate that was too low because it didn't include the bonus. In such a case, you must determine what the appropriate overtime payment should have been and pay the employee for the difference. Although this can be an administrative burden, as long as the supplemental overtime payment is made promptly after the bonus is provided, there's very little risk for liability.
Exception for gifts and holiday bonuses
While most bonuses will be the type that must be included in the regular rate, the FLSA specifically excludes holiday gifts from this category. As long as the bonus is meant to be a gift and its value isn't measured by or directly dependent on the hours, production, or efficiency of an employee or group of employees, then it doesn't need to be included in the regular rate. In other words, you can give the bonus without having to look back and recompute overtime.
From a practical point of view, your company's overall profitability probably will be a critical factor in whether you'll provide a bonus and/or how much it will be. Nevertheless, by directly tying the bonus to individual or group performance or profitability, the DOL likely will take the position that you're using it to encourage your employees to work harder or more efficiently. In such a case, your intended holiday bonus may be transformed into an incentive bonus, which must be included in the regular rate calculation.
If you want to keep your bonus within the exception for gifts and outside the “incentive” category, you should carefully consider how you announce it to your employees. Your announcement shouldn't include any direct references to corporate profitability, efficiency, production, or the like. If the bonus is truly intended as a holiday gift, then simply announce it that way.
Some additional considerations are worth mentioning. You may provide a holiday bonus with regularity so that your employees expect it each year. The bonus, however, shouldn't be promised ahead of time or given under a contract (such as a collective bargaining agreement).
In addition, you don't have to give everyone the same amount. You may vary the amount of holiday gift or bonus you provide to each employee as long as the factors you use aren't related to performance, hours worked, efficiency, and so on. For example, you may vary a bonus according to each employee's salary or hourly rate or by length of service.
Keep in mind that these issues apply only to bonuses that are provided to your nonexempt employees. Because your exempt employees aren't entitled to overtime, you may directly reference productivity, hours worked, efficiency, or other performance-related factors when announcing or calculating their bonuses.
Determining whether a particular bonus must be included in the regular rate can sometimes be tricky, but with a little planning, you should be able to give holiday bonuses to your employees without incurring overtime pay obligations.