With Christmas around the corner, employers may be thinking about holiday bonuses for their employees.

While such bonuses can help employers show employees appreciation, boost morale, and motivate employees, they may also have unexpected consequences.

The biggest concern that may arise from employer holiday bonuses relates to the overtime pay rate for non-exempt employees.

Under the Fair Labor Standards Act (“FLSA”), a covered, nonexempt employee must receive overtime pay for any hours over 40 worked in a workweek. To calculate an employee’s overtime compensation, you must first determine the employee’s “regular rate of pay.” The regular rate is calculated by dividing the total pay in any workweek by the total number of hours worked.

Where employers must be careful is that total pay is not simply the wages or salary paid to the employee, it also may include bonuses, which can in turn affect that employee’s regular rate and overtime rate.

Under the FLSA, an employee’s regular rate of pay is based on the total compensation for hours worked.

On its face, this would seem to include all bonuses received. However, the FLSA excludes certain types of payments from an employee’s regular pay rate, including discretionary bonuses and gifts.

Specifically, the FLSA excludes “sums paid as gifts” and “payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.”

To be excluded as a gift, the amount of a holiday bonus cannot be dependent on hours worked, production, or efficiency. A bonus may still be considered a gift, even if the amounts paid to employees vary, as long as the amounts are not specifically measured by or dependent on hours worked, production, or efficiency.

Additionally, a bonus is discretionary, and thus excluded from an employee’s regular rate of pay, if: (1) the fact that the payment is to be made and the amount of the payment is in the employer’s sole discretion; and (2) the payment is not pursuant to any prior contract or agreement with the employee, causing the employee to expect such payments regularly.

Both the decision to make the payment and the amount of the payment must be wholly discretionary. If the employer previously promised to pay a bonus, but had discretion to choose the amount, or conversely had discretion to pay a previously agreed upon amount, then the bonus would not be considered discretionary and would not be excluded from the employee’s regular rate.

The Department of Labor Regulations note that a one-time holiday bonus of two weeks’ salary for all employees would be a discretionary bonus, as long as it wasn’t given pursuant to a prior agreement.

However, production bonuses, sales incentives, and attendance bonuses would not fall under this exclusion, since they are all dependent on an employee’s hours worked, production, or efficiency. Such payments are considered nondiscretionary bonuses and must be included in the employee’s regular rate for overtime rate calculation purposes.

Failure to pay employees the appropriate overtime rate may constitute a violation of the FLSA, which can result in overtime wage liability or other damages. This potential liability makes it crucial that employers know the full scope of consequences that may arise from giving out holiday bonuses.

In sum, if a “holiday bonus” can be considered either a gift or a discretionary bonus, then the amount of the bonus will not be included in the employee’s regular rate of pay and will not impact that employee’s overtime rate of pay. To help a bonus remain in one of these categories, a holiday bonus or specific payment amount should not be promised in advance.

Call General Counsel, P.C. Today

If you’re unsure whether or not a planned bonus will be considered discretionary or have other unintended effects, our attorneys can help you make that determination. Attorneys at General Counsel, P.C. are specialized in labor and employment law and have experience working with business owners across Virginia, specifically in Fairfax County, Arlington, Loudoun County, and Prince William.

Call General Counsel, P.C. at 703-556-0411 today to see how we can help you.