What You Need to Know About Holiday Bonuses: Discretionary vs. Non-Discretionary

With the holiday season in full swing, employers may be preparing to provide their employees with gifts or bonuses. Whether a bonus is discretionary or nondiscretionary has important legal ramifications. Employers may find themselves in hot water if they do not understand the difference.

Does that mean that employers should avoid providing bonuses altogether? No! Bonuses are an important tool to increase employee satisfaction and retention.

Discretionary Bonuses

Discretionary bonuses are akin to gifts and are not earned for performing any specific task. In other words, if an employee is not entitled to, or guaranteed the bonus if they meet certain goals, then it is a discretionary bonus. However, it is also important to note that an employer characterizing a bonus as discretionary does not necessarily make it so. For example, if an employer has a policy of providing their employees with a specified bonus on their one-year anniversary of employment, it does not matter if the policy identifies the bonus as discretionary because, under the policy, an employee would be entitled to the bonus after working for the employer for a year.

Examples of non-discretionary bonuses include things such as: gifts, non-guaranteed rewards for good service, and holiday presents. Discretionary bonuses are not measured by or dependent upon hours worked, production, or efficiency. Discretionary bonuses are solely at the employer’s discretion.

Non-Discretionary Bonuses

Non-discretionary bonuses are a form of compensation that a worker can expect and are often used to incentivize worker productivity. In other words, nondiscretionary bonuses are a form of compensation that an employer has a duty to pay if qualifying conditions are met.

Examples of non-discretionary bonuses include things such as: hiring bonuses, bonuses required pursuant to a collective bargaining agreement or other established policy, commissions, announced bonuses meant to induce employees to work more steadily, rapidly, or efficiently, seniority bonuses issued pursuant to an established policy or practice, guaranteed incentive bonuses, attendance bonuses, production bonuses, sales bonuses, quality and accuracy bonuses, and safety bonuses.

Bonus Classification and Impact on Regular Rate of Pay

The distinction between discretionary and non-discretionary bonuses is important because non-discretionary bonuses affect an employee’s “regular rate of pay,” while discretionary bonuses do not. Courts have long held that an employee’s “regular rate of pay” for purposes of calculating overtime wages includes not only the employee’s base hourly rate, but also includes all non-discretionary payments earned during the pay period. And, as we discussed in a previous article, bonuses that affect an employee’s “regular rate of pay” will also affect the amount of premium wages owed to an employee who misses meal or rest periods.

So, if a holiday bonus is promised pursuant to a prior agreement or established policy, it will be considered non-discretionary. If a holiday bonus is a non-guaranteed gift, it will be considered discretionary.

For employers, now is the perfect time to review your payroll policies and practices. The liability for misclassifying a bonus can have devastating effects on your business. Please contact the attorneys at Freeburg & Granieri, APC today to have your payroll policies and practices reviewed. The attorneys at Freeburg & Granieri, APC can also assist employers in auditing prior wage and bonus payments to ensure that employees’ “regular rates of pay” have been calculated accurately.

For employees, it is important that you are paid all wages owed. If you think you are not being paid all your wages, or if your employer has miscalculated your “regular rate of pay,” please contact the attorneys at Freeburg & Granieri, APC today.

Happy holidays from our team at Freeburg & Granieri, APC!