Tuesday, December 20, 2022

Avoiding liability missteps with year-end bonuses

As employers plan for year-end bonus payments to employees, you need to learn the difference between nondiscretionary bonuses, discretionary bonuses, and special occasion bonuses (such as holiday or other gifts). Otherwise, you risk finding a Department of Labor lump of coal in your wage and hour stocking.

What's the difference between these three types of bonus payments?

Nondiscretionary Bonuses

Under the FLSA, an employer must include nondiscretionary bonuses (which the DOL unhelpfully defines as any “bonus that fails to meet the statutory requirements of a discretionary bonus”) in the regular rate of pay of non-exempt employees. As a result, these bonus payments will increase an employer’s overtime liability to non-exempt employees who work more than 40 hours in a work week. Examples of nondiscretionary bonuses include bonuses based on a predetermined formula such production bonuses; bonuses for quality/accuracy of work; attendance bonuses; and safety bonuses.

Discretionary Bonuses

A discretionary bonus qualifies for exclusion from the regular rate if the employer retains sole discretion both as to the fact of payment and the amount of payment, and it cannot be required per a contract, agreement, or promise. Examples of discretionary bonuses include a one-time payment for meeting a goal or challenge; employee-of-the-month/year bonuses; and severance payments.

Gifts, Holiday, and Special Occasion Bonuses

A gift, holiday, or special occasion bonus qualifies for exclusion from the regular rate if it’s a bona fide gift. If it is in any way measured by hours worked, production, or efficiency, it is so large that employees would reasonably consider it part of their wages, or it is paid pursuant to some agreement or policy, then the bonus cannot be considered to be a gift and must be included in the regular rate for overtime purposes.

Calculating the Regular Rate with a Bonus Payment

Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing the regular hourly rate of pay and overtime compensation. For purposes of calculating the regular rate of pay, the bonus does not have to be included in its entirety in the week it is paid. Instead, an employer can apportion the bonus amount back over the workweeks of the period during which it was earned. The employee must then receive an additional amount of compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week. If it is impossible to allocate the bonus, an employer can select some other reasonable and equitable method of allocation.


Like most wage and hour issues, the handling of bonus payments to non-exempt employees is complex and presents a real trap for the unwary employer. If you are considering paying a year-end or other bonus to hourly and salaried non-exempt employees, seriously consider running it past employment counsel before making the payments.