Christmas Bonuses and Overtime

One of the heart-warming stories over the long holiday weekend was about a family owned business who sold their business and gave employees sizable bonuses derived from the sale. The amount of the bonus was based upon years of service with the company. But being an employment attorney I am trained to look a gift-horse in the mouth and my immediate thought upon hearing the story was how could the bonus be structured so as to avoid overtime liability? After all, the Fair Labor Standards Act provides that all "remuneration for employment" must be included in the amount that is used to calculate overtime (this amount is called the "regular rate"). Thes statute then excludes certain payments, one of which is discretionary bonuses, another, gifts and payments on special occasions.

So, not all bonuses must be included in the regular rate, however. As to discretionary bonuses, both the fact of the payment and the amount must be discretionary. The Department of Labor regulations, 29 C.F.R. 778.211, explain that the employer must pay the amount without "prior promise or agreement" and there must not be a contractual right to the bonus. This type of bonus includes, the DOL says, attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee's continuing in employment until the time the payment is to be made and the like.

Congress recognized, however, that only Scrooge would create a disincentive for employers to pay Christmas bonuses so a separate provision covers "sums paid as gifts, payments in the nature of gifts made a Christmas time or on other special occasions." There are two catches here. First, even a Christmas bonus must be a "gift" as in the employees must not have a contractual right to the payment but the DOL recognizes that employees tend to expect Christmas bonuses so the regularity of the payment is not a problem here.

A second catch is that the bonus cannot be based upon hours worked, production or efficiency for if it is, the amount must be accounted for in the regular rate. The DOL regulation, 29 C.F.R. § 778.212 further provides that the bonus can (without impacting overtime liability) be based upon the employee's "length of service with the firm." The bonus amount can also be based upon the salary or regular hourly rate so long as it is not based upon or derived from the hours worked, production or efficiency. The DOL also recognize that bonuses based upon total earnings, as opposed to straight-time earnings, need not be included in overtime calculations because mathematically, the bonus will already include pay for overtime hours worked. Combinations can also be made, such as where the bonus is based upon two weeks salary and an additional amount for years of service.

As any HR manager knows, no good deed goes unpunished, so if you are fortunate enough to be paying out year-end bonuses, be aware that there are overtime considerations that can and should be avoided.