The Holiday Season is Near… Time to Review Your Bonus Payment Practices

Contributed by Sara Zorich

It is that time of year again when the snow begins to fall and the holiday shopping begins.  It is also the time of year when employers determine whether their employees are entitled to certain bonuses – thus it is a good time to review your pay practices!

When employers analyze paying bonuses, the first step is reviewing whether an employee is exempt or non-exempt.  An exempt employee is exempt from the overtime requirements under the Fair Labor Standards Act (FLSA) and the Illinois Minimum Wage Law (IMWL).  Thus, if you provide an exempt employee with a bonus, you need not worry about any overtime owed to the employee.  However, non-exempt employees are entitled to overtime and some types of bonuses require the employer to go back and recalculate the employee’s regular rate of pay and pay additional overtime based on the payment of a bonus to a non-exempt employee.

There are generally two types of bonuses: discretionary and non-discretionary.

  • Discretionary Bonus – This type of bonus is one in which the employer has the discretion both with regard to (1) paying the bonus at all and (2) the amount of the bonus.  The amount of the bonus is not dependent on any prior promise to the employee and is not announced to the employee until a time near that in which the payment will be made.  Further, the amount of the bonus is not included in the regular rate of pay calculation.  Typically a holiday bonus given as a gift is considered a discretionary bonus.
  • Non-Discretionary Bonus – This type of bonus is articulated and promised to the employee in advance and is usually awarded to encourage efficiency, performance, attendance and/or productivity.  The bonus may be given on a regular basis based on specific requirements met to qualify for the bonus or at the end of a period or year. 

So what do you do if you have determined you owe a non-exempt employee a non-discretionary bonus?  First, you must determine what time period the bonus covers.  This will be determined based on the agreement with the employee as to when the bonus is earned.  Once you have determined the time period for the bonus you will need to apportion the bonus over the given time period.  For example, a monthly bonus of $100 for perfect attendance would be allocated at $25 for each of the four weeks of the month.

If any overtime is worked by a non-exempt employee in a week in which a bonus payment is allocated, the employer must recalculate the regular rate of pay to include the additional bonus payment.  Then the employer would review the overtime amount previously paid to the employee and compare it to the new overtime amount due based on the increased regular rate of pay.  The employer must then pay the employee any additional overtime due.

Employers must be cognizant of these requirements regarding bonuses to (1) avoid the surprise of paying large additional overtime payments to employees working many overtime hours per week and (2) avoid costly litigation for failing to pay overtime properly.