4 Ways To Avoid Legal Hassles When Handing Out Bonuses

Posted May 10th, 2021.

As It Appeared On
publication logo

By Daniela Porat

When it comes to awarding bonuses that stay on the right side of wage and hour laws, employers have to clearly communicate what the bonuses are and why employees are receiving them, attorneys say.

Under the Fair Labor Standards Act, nondiscretionary bonuses, which can be predetermined by formulas or production quotas or are otherwise promised to an employee, must be included in the regular rate of pay. On the other hand, discretionary bonuses, which are awarded at the “sole discretion” of the employer, can be excluded. But these distinctions are not always clear-cut.

Ed Sullivan, an attorney for Oberti Sullivan LLP who has represented both workers and management, said employers are putting themselves at great risk if they don’t carefully evaluate their bonus practices.

“It’s one of the largest remaining low-hanging fruit items on the plaintiffs attorney wage and hour agenda,” he said. “Companies will either pay to update their policies or pay eventually in litigation.”

Here, Law360 looks at four tips employers should keep in mind when awarding bonuses to their employees.

Describe the Bonus — In Writing

Michael Nader, a shareholder at management-side firm Ogletree Deakins Nash Smoak & Stewart PC, said employers should ask themselves: Why is this bonus being paid?

To answer that question, Nader suggests employers “consider how in fact the bonus is established” and write “a narrative description of the bonus that accurately reflects” its raison d’etre.

For example, if a company wants to award what it thinks is a discretionary bonus, Nader recommends that employers “draft a notice to employees that notifies them of the unique occasion that serves as the basis for the gift.”

“So again, employees learn that this was a gift, it was at the sole discretion of the company, it’s not something that I should expect every year or every month or on some other regular occasion,” he said.

Michael Palmer, a partner at worker-side firm Sanford Heisler Sharp LLP, offered other questions that a company can ask about a particular bonus to determine where it falls.

“What promises have been made to the employee?” he said. “Have there been any assurances that a bonus will be paid out? Have there been any promises about actually the way in which such a bonus would be calculated?”

Palmer said that in order for a bonus to be discretionary, it needs to be fully discretionary, both in terms of whether a bonus will be paid at all and the way in which the bonus is calculated.

Communicate Terms of Bonus Clearly

Once the employer has written a solid description of the bonus, the next step is to clearly communicate those terms.

Lisa Lupion, a management-side partner at Orrick Herrington & Sutcliffe LLP, said it is critical for the employer to outline under what circumstances an employee might expect a bonus. She said that if a company says it will pay a worker what it sees fit if the company does well, that falls more under the discretionary category.

But if the company says, “‘We will pay you a specific amount based on a specific achievement,’ that starts sounding contractual and not discretionary,” she said.

For example, an “employee of the month” award could be discretionary or nondiscretionary depending on how its terms are conveyed and implemented.

Lupion said that if a company picks the employee of the month entirely based on its discretion and each month the award could be given to anyone, that could constitute a discretionary bonus.

But if the employee of the month is the person who sells $500 worth of widgets, then “it starts sounding like you’ve abandoned some of that discretion,” she said.

Don’t Give Implicit Promises

Employers should also avoid situations where a discretionary bonus morphs into a nondiscretionary bonus, attorneys said.

A company should take into account whether “a certain bonus is routinely paid to employees, such that the practice itself might create a reliance on the bonus and an appearance that it is not discretionary,” Nader said.

Randi May, a partner at management-side firm Hoguet Newman Regal & Kenney LLP, said implicit promises can also hurt employee morale.

May said it “sends a very bad message to the employee” if an employer suddenly reduces the amount of a bonus or decides not to pay it because the employer is concerned about establishing a promise of pay.

“I think the million-dollar question is, well, if I get something every year, does that sort of become a promise, does it sort of become an expectation,” she said. “If employers take no steps, they’re at risk for that to be a sort of implied promise, even though it’s not expressed because [employees] come to rely on it.”

She said it’s better to have an explicit discussion or to put something in writing about the bonus and to manage expectations.

Remember That Hazard Pay and Vaccine Incentives Are Different

The COVID-19 pandemic has created a number of new employment law challenges and questions, and bonuses are no exception.

If a company is providing so-called hero pay premiums to workers in light of the pandemic, Nader recommends that employers clearly articulate those premiums in employees’ wage statements.

Those kinds of payments should be included in a worker’s regular rate of pay, according to guidance from the Wage and Hour Division of the U.S. Department of Labor.

But an incentive for getting vaccinated can be treated as a special one-time payment and can be excluded from overtime calculations in accordance with the DOL guidance, May said.

–Editing by Abbie Sarfo.

Share this News Article

Back to Top