Under the federal Fair Labor Standards Act (FLSA), bonus payments are divided into discretionary and non-discretionary types. Only non-discretionary bonuses, incentive payments and commissions may count toward as much as 10% of the salary threshold beginning in December 2016.
Bonuses are discretionary if:
- Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer; and
- The bonuses are not paid under any prior contract, agreement or promise causing the employee to expect such payments regularly.
Bonuses are non-discretionary if the employer promises, contracts or agrees to pay a bonus to the employee. Non-discretionary bonuses include:
- Bonuses that are promised to employees upon hiring
- Bonuses that are the result of collective bargaining
- Bonuses that are announced to employees to induce them to work more steadily, more rapidly or more efficiently
- Attendance bonuses
- Individual or group production bonuses
- Bonuses for quality and accuracy of work
- Bonuses that are announced to employees to induce them to remain with the firm
- Bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made
The FLSA provides for several narrow exemptions from the requirement that bonuses be included in an employee’s regular rate of pay for the purposes of determining the amount of weekly overtime owed. The onus is on the employer to prove that a payment meets one of the exemption requirements. The exemptions include:
- Gifts, or 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.
- Vacation, holiday or sick leave pay; payment for failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, and other similar payments to an employee that are not made as compensation for his or her hours of employment.
- Sums paid in recognition of services performed during a given period if either:
- Both the fact that payment is to be made and he amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not under contract, agreement or promise causing the employee to expect such payments regularly; or
- The payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan, if the amounts paid to the employee are determined without regard to hours of work, product or efficiency; or
- The payments are talent fees paid to performers, including announcers, on radio and television programs.
- Contributions to a trustee for retirement, life, accident or health insurance or similar benefits for employees.
- Premium overtime pay.
- Premium pay for working holidays or weekends.
- Extra compensation provided by a premium rate paid to the employee under an employment contract or collective-bargaining agreement.
- Certain stock option compensation that meets the requirements of 29 USC 207(e)(8).
DOL intends to simplify the rules
With this final rule increasing the salary threshold and allowing bonuses to count towards as much as 10% of the salary threshold, the DOL seeks to ensure that FLSA’s intended overtime protections are fully implemented and to simplify the identification of nonexempt employees, thus making the executive, administrative and professional employee exemption easier for employers and workers to understand and apply.
As always, our mission is to keep you fair, square, and legal in all areas.
Susan E. Crocker