Hey, guess what? Emily is back.
Last time we discussed the requirements for excluding gifts and Christmas bonuses from the regular rate under the FLSA. Now we are going to discuss discretionary bonuses, which are quite similar.
Under the Regs, you can exclude from the calculation of the regular rate:
(3) Sums paid in recognition of services performed during a given period if . . . (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
29 CFR § 778.200 (a)(3). Like gifts and holiday bonuses, for the employer to exclude a discretionary bonus, the employer cannot be obligated to pay it. As soon as the employer promises to pay the bonus, whether in a collective bargaining agreement, or in a handbook or policy manual, the bonus is no longer discretionary and must be included in the regular rate. See O’Brien v. Town of Agawam, 350 F.3d 279, 295-96 (1st Cir. 2003). Also, if the bonus is tied to objective criteria like production numbers, efficiency rates, or even attendance, it is not a truly discretionary bonus and cannot be excluded from the regular rate. One caveat – according to the Department of Labor, it is okay to document the decision to pay the bonus in writing before the bonus is paid, as long as the employer did not previously promise the bonus. U.S. Dep’t of Labor FLSA Op. Letter 2008-12, (December 1, 2008).
What you can’t do is say in your employee handbook that you retain discretion to pay an annual or other periodic bonus when you pay it every year – it’s not discretionary just because you say so. The same is true for performance-based bonuses. For example, back when I was a seller of toys, we had a bonus program with a clear performance-based structure. If we hit daily sales targets, we were paid a bonus for each hour worked on that day. If my employer put something in the employee handbook about that bonus being discretionary, the bonus would still need to be included in the regular rate because it is tied to objective performance criteria, the sales targets. Hmmm . . . I think they might owe me a dollar or two.
You may be thinking, “What about a signing bonus?” Signing bonuses come in two flavors: up-front payments before work begins and deferred payments paid after a particular length of service. The up-front payments do not need to be included in the regular rate, but the deferred payments do. Those deferred payments are meant to encourage employees to remain at their job, and the Regs specify that they cannot be excluded. 29 CFR § 778.211(c). Since an up-front signing bonus isn’t related to the employee’s length of service, it can be excluded from the regular rate. Minizza v. Stone Container Corp. Corrugated Container Div. East Plant, 842 F.2d 1456, 1462 (3d Cir. 1988).
Next time, we’ll take on the thrilling topic of percentage bonuses.