Discretionary and Non-Discretionary Bonuses

Employers usually pay two types of bonuses: non-discretionary and discretionary.

Discretionary bonuses are usually paid as a gift for past services and are not measurable by an employee’s work performance, and/or hours worked.  An example of a discretionary bonus is a holiday bonus or special occasion bonus.

Non-discretionary bonuses are bonuses that are intended to increase an employee’s performance and efforts.  For example, bonuses paid on work performance efficiency and quality, attendance, years of service, and bonuses promised to employees at time of hire are considered non-discretionary.

When paying out non-discretionary bonuses, you must also pay the overtime “premium” on the bonus.  According to the Department of Labor, since the bonus was earned during the regular hours as well as the overtime hours, the overtime “premium” on the bonus is paid on half-time or full-time (for double time hours) on the regular bonus rate (from DLSE Manual). Unfortunately, you cannot just pay an employee a $100 bonus, if they worked any overtime in the pay period for which the bonus was earned.  You must reference the bonus on their pay stubs and note the workweek(s) that the bonus was earned.

Example On How to Calculate Overtime Premium When a Bonus is Paid:

Regular hourly rate of pay………………………………………………………………………………………..$10.00

Overtime rate of pay………………………………………………………………………………………………..$15.00

Total hours worked in workweek = 50

Total regular hours worked= 40 (8 hours x 5 days)

Total overtime hours at time and one-half = 10 (2 hours x 5 days)

Bonus………………………………………………………………………………………………………………………$100.00

Regular bonus rate:

$100.00 (bonus) ÷ 50 (total hours worked) =

$2 .00 ÷ 2 (for half of the regular rate) =

$1.00 x 10 (Overtime Hours) = $ 10.00

Total earnings due for the workweek:

Regular hours: 40 hours @ $10.00 ………………………………$400.00

Overtime: 10 hours @ $15.00 ……………………………………..$150.00

Bonus ……………………………………………………………………………$100.00

Overtime on bonus…………………………………………………………$ 10.00

Total ……………………………………………………………………………$660.00

Remember, wage and hour laws vary by state, it is important that you understand that as an employer you are mandated by law to pay your employees for all hours worked.

The Bottom Line

Confused yet?? There is a lot to know, and a lot to implement. If you are concerned about tackling wage and hour compliance alone, you may want to consider outsourcing some of these complicated laws to professionals who can guide you every step of the way. Please contact us for a free wage and hour consultation.

Contributed by: Thi Ha and Monique Stennis, CPEhr

If  you employ staff in California, the new law will not affect your state-based employees, as the California minimum wage is $8.00. However, be aware that employees residing out of state are subject to their states’, or federal, guidelines.

The Federal Minimum Wage is governed by the Fair Labor Standards Act of 1938. The FLSA establishes minimum wage, overtime rules, record-keeping requirements, and youth employment standards affecting employees. Remaining compliant with the myriad of FLSA requirements is daunting, as employers often confuse the federal guidelines with their state rules.

If you are concerned about compliance, contact an HR Consulting firm who can guide through the FLSA maze.