Episode 408: The Ins and Outs of Employee Bonuses

Employee Bonuses raining money

In this episode, we give managers payroll heartburn over bonuses and commission payments. Did you know that bonuses and commissions affect hourly wages and cause the need to adjust past pay for overtime? 

“What I need you to know, and this is the mindblowing part, is that when an employee works the first quarter of a year and earns a bonus or commission at the end of that quarter if they have worked any overtime during that first quarter where the bonus was subject to –  YOU  have to go back and look at the overtime hours and add that bonus into the overtime hours. You owe them more money. Not only do you owe the commission/bonus, but now that you know how much they earned, you need to go back and adjust their overtime pay.”

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Voice Over: You’re about to listen to another episode of What The Hell Just Happened?! Join Paul Edwards and his guests as they discuss and sometimes even solve some interesting HR problems. 

Paul: And… I’m gonna go off the rails sometimes and talk about whatever I want. 


Paul: So with that introduction from the podcast, welcome to What The Hell Just Happened in HR?! Tiana, would you please introduce yourself and tell everybody who’s listening what you do?


Tiana: Yeah, absolutely. Hello, listeners. I’m Tiana Stark. I was formerly a senior Solutions Center advisor at CEDR. I’ve stepped into a new role now. So I am our senior Compliance Advisor.


Paul: You are. 


Tiana: I am.


Paul: And you are bringing a really good topic today. We’re going to talk about bonuses. So, look, sometimes on the podcast we get into a little bit nerdy stuff. It’s maybe a little bit more instructional because What The Hell Just Happened in HR?! on this episode, is that a business has implemented a bonus program for its team.


Tiana: Right.


Paul: And now that impacts, well, that’s impacted by wage and hour regulations. And so Tiana is responsible for coordinating our efforts around timekeeping because we have our own timekeeping software.


Tiana: Uh hmm.


Paul: Integrated into the software that CEDR has, which by the way, and just by the time this gets released, we will have released the new software. So Ta Da! Drum roll!


Tiana: [joyful horn noises]


Paul: I did a drum roll last time, maybe that’s ever used.


Tiana: [laughing]


Paul: Horns? [horn noises]


Tiana: Yeah, I like the horns.


Paul: [horn noises] The name of the software which is powered by CEDR and built by us. So it’s built by HR nerds, is Backstage HR. And so inside of Backstage HR, we have a component which is timekeeping. It’s quite sophisticated. We can set it up for you. 


Tiana: Absolutely.


Paul: So, Tiana, you’re doing a great job over there.


Tiana: Aww. Thanks Paul.


Paul: And there’s just all kinds of factors going on. 


Tiana: There are.


Paul: So in the industries that we primarily work in, which is medical, and we look at dentistry, we can look at, maybe not Urgent Cares, I don’t see a lot of bonus programs in Urgent Cares.


Tiana: Uh hmm.


Paul: But we do see it in lots of other Medisapas and other medically related industries. 


Tiana: Definitely.


Paul: There’s some kind of commission or bonus system in there.


Tiana: Uh hmm.


Paul: And Tiana, I think what most people don’t realize is that these things actually can impact the pay of the person who has already worked hours who are now receiving a bonus. So before we go into the minutia of that, I just want to put a couple of things out there. For everybody, the reason why, and I have a bonus system here at CEDR, we have kind of rewards and bonus systems in place. 


Tiana: Uh hmm.


Paul: What I need you to know, and this is the mindblowing part, is that when you work the first quarter of a year here and we reward you, reward with a bonus at the end of that quarter, if I have an hourly employee who has worked any overtime during that first quarter where the bonus was subject to –


Tiana: Uh hmm.


Paul:  I have to go back and look at the overtime hours and add that bonus into the overtime hours. I owe them more money. Not only do I owe the discretionary or the non-discretionary bonus, we’re going to get into discretionary/non discretionary. 


Tiana: Yeah. 


Paul: What that means. Not only do I have to pay them that, but I have to go back and look at the record to see if anybody worked overtime because it affects what the wage and hour calls a base rate of pay. Did I do okay there?


Tiana: You did great!


Paul: Okay, now the thing that I really wanted to get into is I like these kinds of systems because they can incentivize engagement from your team because in order for, well for me/to me, for a bonus to be effective, it needs to be tied to some kind of performance and outcome. So a lot of times we’re giving, a practice may give some kind of base thing or a set of base things that they want to accomplish over the next year. And then you break it down into quarters and months and weeks and you take, it’s little tiny baby bites, right? 


Tiana: Absolutely. Yeah.


Paul: So a component, one component could be, we are not doing a good job of asking. When we do a good job of asking for referrals, we get more referrals. 


Tiana: Uh hmm.


Paul: But the thing is, is that we don’t have a great system in place or any accountability around it. 


Tiana: Uh hmm.


Paul: And it seems like when we get super busy or a little shorthanded, we stop asking for the referrals.


Tiana: And it falls off the wayside.


Paul: And it falls off the wayside. 


Tiana: Uh hmm.


Paul: And what we learned maybe last year when we were on top of referrals, maybe we had the best referral asker we ever had and he or she doesn’t work for us there anymore, or they got maybe moved up and they’re not – 


Tiana: Sure. 


Paul: They’re not in a position. We learned last year that we were able to drive into the practice through referrals, an extra $175,000 in income, just through referrals alone. 


Tiana: Oof.


Paul: And that’s people who are happy with us – 


Tiana: Uh hmm.


Paul: Recommending other people. And that’s who you want. You want your happy customers recommending more.


Tiana: Absolutely.


Paul: So what we can do is break that down into data and then we can measure the data and we can actually use the data as kind of a gamification and an engagement tool, which frankly makes everybody’s life happier. 


Tiana: Yeah. And gives them something to work towards.


Paul: It does. It’s something to attach to. Like you can see your place in and what you’re doing and you can see when you’re succeeding and you can no matter who you are, you might be able to come up with better suggestions or a better script or better timing and when you ask for the referral –


Tiana: Yeah.


Paul: Like have you ever been asked…You order something online, Tiana? And they send you and so they’re mailing it to you – 


Tiana: Uh huh.


Paul: And the next day they ask you to review the product. 


Tiana: Oh yeah.


Paul: But you don’t have it?


Tiana: That happens all the time, right? It goes straight into your email – 


Paul: It goes straight…


Tiana: Like what did you think about this product? I’m like, Bro, I got to wait two more weeks for this to arrive in the mail. [laughing]


Paul: Yeah, you guys are running behind actually. Do you really want me to review the product that I don’t have yet? And then they send it six more times before you get it? At that point, I put you in spam and you’re never going to get the review. But I just wanted to point that out because you’re welcome, America and all the businesses out there.




Paul: So I just want to point out that the timing of asking for that is critical. And so again, I digress.




Paul:  I’ll come back to the path. I love the proper use of bonuses as incentives where you’re attaching it back to data and everybody’s got a good sense of accomplishment. Let me tell you what doesn’t work. We need to make more money and we’ve got some data points here and we need to make more sales or we need to twist people’s arms or we need to do that kind of thing. That does not…I mean, it will work, it might work. 


Tiana: Uh hmm.


Paul: Hard selling people, over selling people and, you know, in the context of relationship. That might work for a period of time, but what you’re going to end up with is a bunch of wrong fit patients and customers and –


Tiana: That’s a really good point.


Paul: It’s…You got to be careful.


Tiana: Yeah.


Paul: Because I’ve incentivized, I’ve had a really super incentivized salesperson be a little too arm twisty.


Tiana: Ah.


Paul: And you end up with people purchasing products that shouldn’t purchase them in that mindset. They’re not ready. 


Tiana: Yeah.


Paul: They may never be ready. They’re, you know, so you just have to be careful. Okay. So I just wanted to point out, these are the reasons why I love doing bonus systems. I will point this out to everybody.


Tiana: I think that’s great, Paul, and it’s really good to hear the business owner perspective to that too. I think you highlight something that actually just sort of blew my mind a little bit because when I think about bonuses –


Paul: Uh hmm.


Tiana: You know, of course I’m coming in from the advisor perspective.


Paul: Right.


Tiana: And it’s wage and hour rules.


Paul: Yeah.


Tiana: And we’re going to get to that in just a second. So that’s usually what I’m thinking about. But just from your perspective, I think the efficacy of having a bonus based on referrals and what that does for longevity, too, you know, is attracting people who want to do business with you, and are referred by people who are happy and like that pipeline that it sets up in that way. And that’s something that’s going to pay dividends for a long time rather than just getting more sales and selling more product when people don’t need it or whatever that might look like.


Paul: And you’re sharing in the success. 


Tiana: Yeah.


Paul: You’re connecting your team to the income. So it’s one thing for someone to walk into your office and not know anything about anything and demand a raise. 


Tiana: Yeah.


Paul: It’s another thing for someone to walk in your office and say, “I’d like a raise because I know I’m the one who fixed the referral thing and I did this and I did that.” And now they can share in the income. The whole team can share and the business moving forward. Okay, so we only have so much time on the podcast. 


Tiana: Okay.


Paul: We have to get into the, we have to get to the nitty gritty. There’s one other point that I wanted to make before we jumped into the kind of technical side of this. What was the point that I wanted to make? Well, it’ll come up and I’ll interrupt you and knock you off your train of thought.


Tiana: That sounds great. Yeah. Just knock me off my train of thought. [laughing]


Paul: Alright.


Tiana: I want to set a scene – 


Paul: Okay.


Tiana: In how this comes to us.  So frequently, we’ll be talking to a member and we’re looking at their handbook, adding policies, and they’re like, “Oh, yeah, you know, I want to add a bonus policy.”


Paul: Or I have, I’m giving bonuses or –


Tiana: I get bonuses.


Paul: I saw I needed to, I read your article and I see I need to do something about it.


Tiana: Yeah, yeah. So it comes up that way. And so I should have a policy that reflects this as well. At our office, we call it a discretionary bonus. 


Paul: Uh huh.


Tiana: So this will be the way this is framed a lot.


Paul: That’s what they tell you. They’re like – 


Tiana: Yeah. They tell me it’s discretionary.


Paul: It’s discretionary.


Tiana: Yeah. So when I hear that and if you’re a member out there listening to this podcast, you’re going to get a series of questioning from any one of us when you tell us that and it’s really just because we want to make sure you do this right.


Paul: It’s a cross examination, is what it is.


Tiana: It is a cross-examination. I’m not going to lie. [laughing]


Paul: Yeah. Yeah.


Tiana: But what this looks like is, you know, I’ll want to know, first off, how does somebody earn this bonus? And a lot of times the answer to that question is very much in line with what you were just talking about Paul.


Paul: We have a set of goals. We have some data.


Tiana: Oh, yeah. We have a set of goals.


Paul: If we hit it, we give it.


Tiana: Yeah. Meeting certain referral numbers or how many Invisalign cases you know, we’re able to get people to sign on for.


Paul: Let me inject this. 


Tiana: Sure.


Paul: How would it feel to everybody listening out there? If you’re on the receiving end of this and at the end of all of that, of everything we’ve been saying and you were going down, we said, 

“And you may or may not get a bonus of an undetermined amount if we hit all of these numbers.” How impactful would that be? It would be zero impactful.


Tiana: Yeah, that would stink. [laughing]


Paul: But that would be discretionary.


Tiana: That’s…there it is.


Paul: If you kill it, we may or may not give you some amount of money. 


Tiana: Uh hmm.


Paul: It could be $5. It could be $5,000. 


Tiana: Uh hmm.


Paul: Or it might not happen at all. That is a discretionary bonus.


Tiana: Yeah. And I think the way that this gets misunderstood…So first off, if you told me that – it’s based on meeting certain goals, I am going to tell you this is actually not a discretionary bonus. 


Paul: Correct.


Tiana: This is what we call a non-discretionary bonus. 


Paul: Yeah.


Tiana: And this is really something where the parameters have been set forth by the Department of Labor. 


Paul: Yup.


Tiana: You know, this is part of the Fair Labor Standards Act. When you were having people work towards specific performance based goals, then that is not discretionary any further. You know, a true discretionary bonus is out of the goodness of your heart. At the end of the year, you wanted to give out a holiday bonus. People don’t know about it. It’s not something you put in writing. You’re not promising it. You know, it’s just something that happens. 


Paul: Hey – 


Tiana: Nobody had to work towards that.


Paul: And in fact, and this is part of the rules, every now and then, you don’t give the bonus. 


Tiana: Yeah. 


Paul: Regardless of what’s going on.  Either you can’t, you don’t or you won’t. 


Tiana: Uh hmm.


Paul: So giving a, if you, if you give a non-discretionary bonus, we’ll call it that, out on a regular basis. Guess what that is? That’s a…that is not…I mean. [laughing]


Tiana: Or a discretionary bonus.


Paul: Giving a discretionary bonus out on a regular basis? That becomes a non discretionary bonus.


Tiana: Yeah, that’s totally non discretionary.


Paul: It’s a fact pattern. 


Tiana: Yeah. 


Paul: Yeah.


Tiana: So it’s a regular expected thing. 


Paul: Yeah. 


Tiana: You know, and so that’s where it really comes down to if you’re giving a bonus that is just, you know, I might give a holiday bonus if we had a good year, there weren’t any specific goals that had to be met. I’m just looking at our numbers. You don’t really need a policy for that. That’s just something that you give. 


Paul: Yeah.


Tiana: But the inverse, if it does have performance criteria, I think sometimes business owners think, “Oh, it’s a discretionary bonus because at my discretion, I might be able to change the terms -”


Paul: Right. Right.


Tiana: “Or I might be able to do something different with that.” And you do, to a sense, have the discretion to, in the future, maybe that bonus program will look different.


Paul: Going forward. 


Tiana: Forward. Yeah.


Paul: Tomorrow. In the next hour, the bonus has changed. I’m doing a, I’m making a discretionary change, a discretionary decision to make a change in the bonus system going forward. But Tiana?


Tiana: Uh hmm?


Paul: How does that impact maybe the first half of the quarter? Can I go back and change the rules?


Tiana: No. You can’t. 


Paul: No. 


Tiana: Yeah. So it can’t be changed retroactively. 


Paul: So you don’t have discretion there.


Tiana: Yeah. So you don’t have discretion there. You have discretion in very limited ways. And so that’s where I have to reiterate this for retention. [laughing] You know, what you said in the beginning, Paul, is that when you are giving this quarterly bonus to the team – 


Paul: Yup.


Tiana: And it was based on goals that you set?


Paul: Yup.


Tiana: You’re going to have to factor that full amount in and look back at the earning period to which people were earning the bonus and see if any of the nonexempt employees worked overtime.


Paul: Nonexempt, by the way, is our nerd term for hourly employees. 


Tiana: Yeah.


Paul: Okay.


Tiana: Thank you.


Paul: So Tiana, I can say this, no overtime worked? This is not your problem. 


Tiana: Totally. 


Paul: You just award the bonus like you normally do discretionary/non discretionary. You give the bonus, you take out the taxes like you always do and you give the money to the employees. 


Tiana: Definitely. Yeah.


Paul: Also, for employees who are exempt this does not it does not impact them because you are not paying exempt employees a base rate of pay based on their hourly work.


Tiana: Uh hmm.


Paul: You’re in a different model.


Tiana: So I think it’s a good question to ask yourself. If you’re offering a bonus that’s based on performance criteria, is it common at my office for people to go into overtime?


Paul: Okay, now I have a ton of questions for you. 


Tiana: Okay.


Paul: Okay. Tiana…You know, this is a loaded question. I’m trying to figure out how to ask the question, so you give me the answer I’m looking for. 




Paul: So if you’re…I mean you know the answer! 


Tiana: No pressure!


Paul: No, no, no. I don’t know if I know how to ask the question so I get the right answer. I want to say it’s probably the most important factor. It’s an overall…Oh, this is like, this is good.


Tiana: [laughing]


Paul: I feel like we’re playing some kind of game here. 


Tiana: Okay.


Paul: The scenario is, is someone’s worked for you. There’s a bonus system in place. And they don’t make it to the end of the quarter or the end of the month, whatever. Whatever you set and your policies and stuff for when it’s awarded. 


Tiana: Okay.


Paul: What is the most important thing that you have to say in your policy in order to make sure that there’s no misunderstanding about who or how this bonus is owed?


Tiana: Okay, so there should always be a component in that policy that says that you must be employed. You must be working for the full duration – 


Paul: Yes!


Tiana: Of the earning period.


Paul: Yes. And do you know, nobody knows that and we don’t see it show up in any of the bonus policies?


Tiana: Yeah. 


Paul: Let me ask you this other question. Should I take my bonus system? You know, I’ve worked this complicated thing out with all the data and all the things and I’ve got one thing for the hygienist, if we’re talking about a dental office.


Tiana: Yeah.


Paul: Maybe I have another thing. Maybe we’ll go into a different kind of medical setting, satisfaction survey with how they were treated coming in. 


Tiana: Oh, yeah. 


Paul: Hospitals do that all the time. 


Tiana: Uh huh.


Paul: So maybe I’ve got a bonus system for that team because I’m trying to incentivize everybody to get in the game with me and make the patients and the customers happy. 


Tiana: Sure. 


Paul: Should I take all that and tuck it into the employee handbook?


Tiana: No, not for the specific teams. 


Paul: Yeah.


Tiana: You know, we want to keep the handbook applicable to everybody. Right?


Paul: And just think about every single situation and you don’t want to come back and change the employee handbook. 


Tiana: Exactly.


Paul: So the bonus system is acknowledged, but it’s outside.


Tiana: In writing –


Paul: Yeah.


Tiana: But separate from the handbook because your hygienists don’t need to know the incentive programs that your front desk employees are working towards. Vice versa. You know, it’s –


Paul: Can I?


Tiana: Uh huh?


Paul: Can I use the bonus as a hammer?


Tiana: No. [laughing]


Paul: You know what I mean? Like, if you’re bad or you do something I don’t like, I could take your bonus away from you that you’ve already earned.


Tiana: Ooh. Not in that context. You can’t take away what’s already been earned, but let me speak to this – 


Paul: Wait a minute. Wait a minute.


Tiana: Eh…


Paul: No, no, wait a minute.


Tiana: Okay.


Paul:  Okay, let me just say this. I have an employee – 


Tiana: Uh huh.


Paul: Who just sucks and everybody else is covering for this employee. 


Tiana: Yeah.


Paul: And I don’t think that this employee should be entitled to participate in the bonus or at least I should…Can I use the bonus to send them a punishing message to them, either by excluding them from it or maybe reducing it for them, as a way to send a message that they better get in line?


Tiana: Here’s what I would recommend. So…[laughing]


Paul: She’s very uncomfortable right now. If you’re watching this, you can see.


Tiana: I’m squirming.


Paul: [laughing] She’s squirming.


Tiana: If they’re going to show the video here. Yeah, I’m sweating a little bit. No, but in all seriousness, you do, you want exceptional people to get the bonus, right? That makes sense. And you want people to meet certain criteria. You have earning criteria.


Paul: Certain criteria.


Tiana: Certain criteria. Now, you could say that you need to be in full compliance with all of our policies.


Paul: Not in any trouble.


Tiana: Not in any trouble. No disciplinary actions, that kind of thing. But the way to phrase it and remember, we have to comply with the DOL rules now because if this is nondiscretionary, this amount of money is considered earned wages. 


Paul: Yeah. 


Tiana: What you can say is that you may be disqualified from future earning periods.


Paul: Right.


Tiana: If you don’t comply with these standards. So it’s not so much, “Hey, you suck this month, you’re not going to get this bonus -”


Paul: Right.


Tiana: “That’s been promised to you that you’ve been working towards,” but rather it’s telling that person that moving forward next period, you will not be eligible because of what happened this month. So that really is the safest way to do it. So it’s not to say that you can’t hold people to certain standards, because you absolutely can, but you just want to be really cognizant of –


Paul: Right?


Tiana: Yeah. We’re not saying that we’re taking it away. Language is important – 


Paul: Yeah.


Tiana: In writing too, so those nuances are important.


Paul: So we’ve got a little bit of in order to be qualified for this, you got to be here when it’s time to award it. 


Tiana: Uh hmm.


Paul: So that kind of takes care of the person who quits or gets fired or whatever. They’re not owed a portion of it – 


Tiana: Yeah.


Paul: A prorated amount of it.


Tiana: Can I throw something out there?


Paul: Yeah. Yeah.


Tiana: Real fast with that too? A common question we get is somebody has quit our practice and they left before it was time for us to pay out the bonus.


Paul: We know what we owe them, but it wasn’t time to pay it out. 


Tiana: Yeah.


Paul: By the way, everybody, this is another component. We’re not going to go down that rabbit hole but this rabbit hole.


Tiana: But yeah, but this rabbit hole. So we had our bonus period in the month of April and we end up giving that April check at the end of May. 


Paul: Right.


Tiana: And this person resigns somewhere in the middle of May. 


Paul: Uh huh.


Tiana: That’s not the same thing that we were talking about earlier – 


Paul: Right.


Tiana: Because that employee was employed for the full month of April. 


Paul: Uh huh.


Tiana: So they still get that bonus check. 


Paul:  Right.


Tiana: You’re gonna send it out to them even after they separated.


Paul: Right. 


Tiana: So make that decision.


Paul: So we would advise you to, yeah, go ahead and pay that amount. 


Tiana: Yeah. 


Paul: Yeah. As long as maybe they’re not in jail for stealing from you. 


Tiana: Yeah. But had that employee left April 20th, they weren’t employed for the full period, so they’re not owed that bonus. 


Paul: Yeah. 


Tiana: If you had that in writing.


Paul: Okay, so this has been very enlightening. We’ve given everybody, I think we’re going to be at about 20 minutes here. I hope everybody who’s listening got something out of this. What The Hell Just Happened in HR?! on this particular episode is that there are bonus systems in place and commission systems in place throughout America in different businesses. I try to make the case for them. I think they work. They are a lot of work to make them work. 


Tiana: It’s true.


Paul: You have to connect people to the success through the data. You’re going to miss your goals sometimes. You use that in order to help get people to help you to solve the problems and make your business better. On the other side of it, you’re sharing in the success with your employees – 


Tiana: Absolutely.


Paul: In a very, very real way.


Tiana: And it can be really positive.


Paul: And there’s an FLSA rule about it. There’s wage and hour rules about it. And also we just, I’m going to say this: None of your timekeeping systems and none of your payroll companies get this right. 


Tiana: Uh hmm.


Paul: It’s very difficult. Even our timekeeping system has trouble factoring this in.


Tiana: Any timekeeping system does.


Paul: All of them because of the complication. But that’s maybe for another subject.


Tiana: Maybe for another day. 


Paul: Yeah.


Tiana: But if you are a CEDR member, we have a calculator you can use to help compute, you know, how to calculate overtime correctly. So we’re happy to help you with that. 


Paul: Yeah.


Tiana: But I just want to throw out bonuses can be a great thing. You just want to work with a trusted advisor and somebody who’s an expert with labor laws in your state and on a federal level just to make sure you do it right.


Paul: There’s that pitch for CEDR. You guys do such a good job over there. 


Tiana: [laughing]


Paul: I’m a little bit biased about that.


Tiana: Thank you. Maybe a little biased. 


Paul: All right, thanks Tiana. 


Tiana: Thanks Paul.


Paul: I appreciate it. 


Tiana: This is great. Thanks.

Voice Over: Thanks for joining us for this week’s episode of What The Hell Just Happened? do Paul a favor; share this with your network. If you have an HR issue or a question, and you’d like us to discuss it on this show, send it to podcast@WTHjusthappened.com. For more HR advice and insights from Paul and his team of experts, you can also join the private Facebook group, HR Base Camp, or visit HRbasecamp.com. Make sure you tune in next week. And remember: better workplaces make better lives.

Jun 29, 2023

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