Almost all businesses fail to implement a policy governing their bonus systems, and it’s getting smaller employers into trouble when it comes to wage and hour and pay checks.

We find that employers often don’t understand that bonus systems/programs are subject to wage and hour rules. In fact, most employers haven’t a clue that bonuses affect overtime, often do not qualify for the infamous “discretionary” clause, and that if offered, need to be governed by a comprehensive and separate bonus policy. When done properly, this approach allows you to change and amend your bonus system at any time, including discontinuing one that is not working.

Bonuses or “pay for performance” solutions are a hot topic across the small business world as employers seek ways to engage and reward employees who perform well.  More and more,  bonuses are being used  to encourage employees to embrace and try new things.  On the downside, they are often used as “cure alls” for whatever ails a business. While this post does not address different types of bonus programs or their merits, employers need to know that wage and hour enforcement responses to employee complaints about bonuses are now routine.  

So we ask a couple of questions. What you would do in any of the following instances? And would you pay out the bonus?

What if an employee quits in the middle of the week or month in which a bonus is due?

What if they get fired?

What if they are great at the conduct that earns them the bonus,  but really bad at showing up on time?

What is the bonus for? Is it a reward for doing a great job or is it for anyone that does an OK job?

Is it contingent on anything else? Can it be?

Can you, at your discretion, just not pay out a bonus that has been earned by stating it in a policy?

Is there an eligibility requirement? Should there be one?

Why not just lump all this stuff into one program?

Can I get the best of both worlds by keeping my discretionary bonus and offering something to reward individuals?

For answers to these questions, you need to understand the difference between discretionary and incentive-based bonuses. At the bottom of this article we provide a couple of sample bonus policies.

There are many different kinds of bonus and incentive programs.  For simplicity, they are broken down into two categories: discretionary-based and incentive-based bonuses. Discretionary- based policies are more subjective and general.  Incentive-based policies are based on a formula, or tied to specific goals, either individually or for the whole team.

Cautionary Note about Incentive-Based Bonuses:  Bonuses tied to individual job performance or to organizational performance  tend to be considered an element of regular compensation, especially if given on a regular and consistent basis.   This means an employer can get into a lot of trouble for not paying a promised bonus at the time of termination.  Employers have been held legally responsible for bonuses expressly promised to employees as incentives. Once the worker has satisfied whatever criteria the employer has established to qualify him or her for the bonus, courts typically order the employer to pay.  This is especially true where the salary or wage is small, and the bonus proportionately larger.

Policy Checklist

• Consider the amount of the bonus you plan to offer. It should be more than a mere gesture, but not so much that it will be devastating if withdrawn or restricted.
• Leaves of absence.  Employees who have taken any leave of absence should not be disqualified from a bonus given to all other employees, as this may imply some type of discriminatory motive. For example, most leaves of absence at small practices generally involve medical leave for pregnancy. Therefore, excluding employees on that basis has a disparate impact on pregnant women.  However, a bonus may be prorated based on the actual days/hours worked during the bonus period.
• Most states require that all forms of remuneration, including bonuses, be treated as wages when figuring the amount of gross payroll for unemployment compensation tax purposes.
• Subjective portions of any bonus/incentive should be determined by a team or committee (e.g., manager, supervisor, or office manager), not just one person.
• If you are giving discretionary bonuses and want a specific way to  incentivize your employees, consider giving an “award” distinct from a bonus.  For example, give recognition for perfect attendance by offering an extra privilege or a paid day off.
• If you want to discontinue or amend a bonus system, it is often best to pay the bonus based on your employees’ current understanding of it, then address changes in writing with an “effective as of” date.
• Establishing a separate bonus policy allows you to modify and use a variety of bonus systems without having to alter and update your employee handbook.

If you have an employee handbook that doesn’t have a bonus policy and
you are wondering what else you have missed, now would be a  good time
to contact us for an evaluation. Call us and we’ll waive the fee.
Just let us know you read this post. Learn more here

Below, you will find two example bonus policies adaptable to most practices.

Example of Discretionary Bonus Policy
Example of Incentive Bonus Policy

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