Employee bonuses are good for morale, especially this time of year. However, depending on the circumstances, bonuses may have to be included in calculating the overtime wages due to exempt employees. In general, the FLSA requires employers to pay all non-exempt employees overtime at time and a half of their “regular rate” for all hours worked over 40 in a workweek. The “regular rate” includes all compensation provided to the employee for services rendered – with just a few exceptions.
Can a Holiday Bonus Be Excluded From the Regular Rate?
Yes, one of the FLSA’s exceptions is the popular Holiday Bonus. The FLSA regulations governing overtime compensation state the the regular rate does not include:
Sums paid as gifts; 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.
The FLSA regulations also specify the conditions which must be present for a holiday bonus to be excluded from the regular rate:
The holiday bonus must be “in the nature of a gift”. This means the bonus cannot be dependent on hours worked by employees, employee production, employee efficiency, or any other performance measuring stick;
The amount of the holiday bonus cannot be substantial enough that employees consider the bonus part of their wages rather than a gift; and
The holiday bonus cannot be paid pursuant to an employer’s bonus plan or an employee’s individual contract.
What if an Employer Routinely Pays Holiday Bonuses Each Year?
The FLSA regulations still permit annual holiday bonuses to be excluded from the regular rate even if employees come to expect a bonus. So long as the amount of the bonus is measured by or dependent on some criteria other than hours worked, production, or efficiency, the holiday bonus is properly excluded from the regular rate.
How Does this Work in Reality?
Example 1: ABC Corp. pays employees a holiday bonus according to seniority or length of service. All employees receive a bonus in the amount of two weeks’ salary plus an additional week’s salary for each 5 years of service. This type of holiday bonus will likely be excludable from the employees’ regular rate.
Example 2: ABC Corp. pays employees a holiday bonus based on hours worked and absenteeism. All employees receive a bonus in the amount two weeks salary for each 1,000 hours they work during the preceding year plus an additional weeks salary if they report to work for the entire week between Christmas and New Year’s Day. This type of holiday bonus will likely be included in the employees’ regular rate for purposes of calculating overtime wages.