Quirky Question #214, Christmas Bonus as Part of Regular Rate of Pay When Calculating Overtime Pay

Quirky Question #214:

             Each year, we provide our employees with a Christmas bonus of varying amounts.  We’ve always done this because we want to reward our employees for a hard year of work and also spread a bit of holiday cheer.  We were recently told by someone that we may have to pay additional overtime wages if we keep giving our employees a Christmas bonus.  We don’t want to take away the Christmas bonus since our employees really appreciate it, but we might have to if this is true.  Is this person right and is this true in Minnesota and Iowa?

 Dorsey’s Response:

By:  Bill Miller and Kevin Ha

The answer is governed by federal law and applied equally in Minnesota, Iowa and all other states. You may have to pay additional overtime wages, although the answer is complicated and depends on the nature of your Christmas bonus.  The federal Fair Labor Standards Act (FLSA) generally requires that non-exempt employees who work more than 40 hours in a week be paid 1.5 times their “regular rate of pay” for each hour worked in excess of 40 hours.  Calculating overtime pay is simple enough if the employee is only paid a basic hourly rate.  More complicated, however, is when the employee receives other payments, such as a Christmas bonus.  Certain bonuses may have to be included when calculating an employee’s regular rate of pay and failure to do so may constitute a violation of the FLSA and lead to overtime wage liability, as well as liquidated damages and attorney’s fees.  In fact, what may have been a small violation at first can cost employers big time if the violation occurred over several years and with multiple employees.

The FLSA broadly defines an employee’s regular rate of pay as “all remuneration for employment paid to, or on behalf of, the employee.”  Thus, at the outset, a Christmas bonus would technically have to be included in calculating an employee’s regular rate of pay.  The FLSA – perhaps recognizing that this provision would provide a disincentive for employers to give bonuses – excludes certain payments from the regular rate of pay, including discretionary bonuses and gifts made at Christmas time or other special occasions.  Accordingly, a Christmas bonus may not have to be included in the regular rate of pay if it can be considered either a discretionary bonus or a gift.

For a Christmas bonus to be discretionary, the employer (1) must retain discretion both as to whether the payment is made and as to the amount of payment, and (2) the employee cannot have a contractual right to the bonus or to any particular amount nor can the bonus be otherwise promised to the employee.  For example, if an employer promises in advance to pay a bonus, then the bonus can no longer be considered discretionary.  Similarly, if an employer promises a bonus of a fixed amount, but maintains the right to give the bonus at its sole discretion, the bonus would still not be considered discretionary.  Attendance bonuses, individual or group production bonuses, bonuses for the quality or accuracy of work or contingent upon the employee continuing in employment until the time the payment is made are all considered “promised bonuses” and must be included in the regular rate of pay.

A Christmas bonus can also qualify for exclusion as a gift made at Christmas time if it is actually a gift or in the nature of a gift and it is not measured by hours worked, production, or efficiency.  However, if the payment is so substantial that it can be assumed that employees consider it a part of their wages, it cannot be considered a gift.  Also, if the employee has a legal right to the payment, such as under a contract or other agreement or promise, then the payment cannot qualify as a gift.

Naturally, employees often expect yearly Christmas bonuses.  The federal regulations recognize this reality and provide that if an amount paid at Christmas or other special occasions is a gift or in the nature of a gift, then it may be excluded from the regular rate of pay even though it is paid with such regularity that employees expect it and even if the amounts paid to different employees vary, so long as the amounts are not measured by or directly dependent on hours worked, production, or efficiency.   For example, the Department of Labor Regulations provide that a one-time Christmas bonus of two weeks’ salary for all employees plus an equal additional amount for each five years of service would not be included in computing an employee’s regular rate of pay.  If this same bonus is promised as part of the employers’ recruiting efforts or is paid pursuant to a contract, the exception would no longer apply.

You could face overtime wage liability if your Christmas bonus does not fit the two exclusions explained above.  Thus, in order to be safe, the Christmas bonus should not be promised in advance, nor should any specific amount or formula be promised in advance.  It is also important that the Christmas bonus be announced like a gift and not be tied to hours worked, production, or efficiency.  Moreover, the Christmas bonus should not be so large that it could be considered a part of the employee’s wages.  Following these steps should allow you to spread holiday cheer without subjecting you to possible overtime wage liability.

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