CEDR Two Minute Trainer: Employee Bonus Programs

Don’t be a Department of Labor Target

The U.S. Department of Labor (DOL) just issued a loud wake-up call to employers: Pay employees properly or find yourselves in federal court. The Secretary of Labor’s warning comes after several recent wins awarding employees millions of dollars in back wages. Don’t be a DOL or employment lawsuit target.  Many employers think they are safe because they comply with minimum wage and overtime laws. What about your bonus program?

Rules About Paying Bonuses to Your Employees

Lady holding cashDid you know that you are not required to provide a bonus but, if you do, you must follow strict rules when you pay one?

Bonus questions usually come up when it’s time to terminate an employee who met the objective requirements of the bonus, but the employer believes (rightfully so)  he or she just doesn’t deserve it. However, bonus rules are strict. So strict, in fact, we recently advised a client to pay a $700 bonus to an employee he caught stealing! As you can imagine, he was none too pleased to hear that she could sue, and win, if he didn’t pay.

Set Conditions and Limitations for Bonuses

Here’s what you need to know about bonuses: If your bonus is based on objective criteria (i.e. production levels, performance goals), it is considered to be a contract to pay wages. That means that once they’ve met your objective criteria, it must be paid, and that it must be considered as part of your overtime calculation.

The good news is that because it’s considered a contract, you can set your own conditions and limitations on eligibility. The best practice is to put your bonus program in writing, making sure to include the following:

  • A discretionary component. Even objective bonuses should include a discretionary component, to be determined by a management team, not one person.
  • Make employees earn their way into a bonus by first complying with all standard office policies and procedures. Bonuses are earned by going beyond the requirements of their position.
  • Don’t use language or implement a policy of “taking away” the bonus for bad behavior. An employee can be disqualified from eligibility, but cannot lose wages they’re already earning in that bonus period. Instead, state that employees who don’t follow policy (i.e. attendance, internet policy, etc.), simply are not eligible for the bonus for the next period.
  • Include a statement that employees must be employed for the entire incentive period in order to be eligible for the bonus for that period (i.e. no pro-rated bonuses for employees who quit or are fired).  This is especially important if you have a monthly production/collection based bonus.

Need help? Members may call the Solution Center at 866-414-6056 to speak with an advisor. Not a member?  Call us anyway.  We offer a one time “Get Out of Jail Free” call.

That’s your 2 Minute Trainer for today.  Now, go create a productive, harmonious, and profitable day!


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