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Unfortunately, A Bit of Ebenezer Is Needed When Giving Christmas Bonuses

Unfortunately, A Bit of Ebenezer Is Needed When Giving Christmas Bonuses Background Decorative Image

Although they are not as common as they once were, employees in many workplaces still expect a bonus at this time of the year, and many employers, hoping to not disappoint, give their employees something like a fixed-dollar amount or the equivalent of one week’s base pay to celebrate the holiday season. While tradition can be a good thing, when it comes to bonuses (holiday or otherwise), employers often fail to consider the effect that regular bonuses may have on a non-exempt employee’s compensation if the employee has worked any overtime during the year.

Consider the following example: A non-exempt employee with an hourly rate of $25 worked 2,080 hours in the year for a total of $52,000. Consequently, if our employee also worked 100 hours of overtime during the year, they would have been paid an additional $3,750 (100 X $25.00 X 1.5) in overtime.

Now let’s complicate the example: Every year, our hypothetical employer has given our hypothetical employee a bonus equal to one week’s base pay, which in the year comes to $1,000.00. What our hypothetical employer may have overlooked is that the employee’s total pay for purposes of calculating the regular hourly rate for overtime calculations is now $53,000.00. The employer will now have to recalculate the employee’s hourly rate to $25.48 (53,000 divided by 2080) and pay $72.12 in additional overtime compensation for the 100 hours of overtime worked during that year. This is not much, but it can add up if there are many other employees in the same situation. Also, making these calculations can be a real headache for the payroll department.

Discretionary bonuses, however, can be excluded from the regular hourly rate calculation. A bonus is discretionary if the employer retains the right as to decide whether a bonus will be paid and the amount of that bonus. The employer that announces in advance that it will pay a bonus at the end of the year—or some other time—without stating that that payment is subject to the discretion of the employer may give up its discretion and not be able exclude the bonus from the non-exempt employee’s regular pay rate.

The employer that has a custom and practice of paying a bonus year after year similarly risks creating an understanding that the bonuses are non-discretionary. While this may sound a bit like “bah humbug,” employers who want to retain a regular tradition of generosity should make it clear each year that the bonuses are discretionary and based on the judgment of the employer. With that message, at least your payroll department will say “Bless you, everyone.”

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.