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Discretionary vs non-discretionary bonuses under the FLSA: What is the difference and why should I care?

Mike Staebell, Iowa Wage & Hour Watch, Iowa Employment & Labor Law, Dickinson Law Firm, Des Moines Iowa

Posted on 04/13/2017 at 07:29 AM by Mike Staebell

My last blog explained how under the Fair Labor Standards Act (FLSA), certain types of bonus payments to non-exempt employees can retroactively raise their “regular rate” of pay, resulting in additional overtime pay due. That post discussed in depth the FLSA requirement that “non-discretionary” bonus pay be factored into non-exempt employees’ overtime pay calculations for the period of time covered by the bonus. This is true even if the bonus is paid long after the overtime was worked, as is the case with year-end or quarterly bonuses. On the other hand, bonuses which are “discretionary” under the FLSA need not be factored into OT pay.    

Most employers believe that their bonuses are discretionary, when they actually are not.  How is an employer to know if the bonus it is paying is considered non-discretionary or discretionary? 

Discretionary Bonuses

In order for a bonus to qualify as discretionary, the employer must retain discretion regarding the fact of payment and the amount of it until a time quite close to the end of the period for which the bonus is paid. The bonus payment, if any, is determined by the employer without prior promise or agreement, and the employee has no contract right, express or implied, to any amount. The key is that the employer has not set up an expectation by employees that a bonus will be paid if certain standards or goals are met. If the bonus meets these criteria, it is considered discretionary under the FLSA and need not be included in overtime pay calculations.

Non-Discretionary Bonuses

If an employer promises in advance to pay the bonus, either expressly or by implication, then the employer has abandoned discretion with regard to the fact that a bonus will be paid—and perhaps even the amount of the payment—and it is non-discretionary under the FLSA. This type of payment must be factored into non-exempt employees’ overtime pay calculations for the period of time covered by the bonus. Most bonuses are paid for the purposes of incenting better performance, productivity, or profitability out of employees. To do that, the employer must set goals or standards in advance of the payout. Doing so makes the bonus non-discretionary, even if the amount of the bonus remains within the employer’s discretion. 

Examples of non-discretionary bonuses include hiring bonuses, attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, and bonuses contingent upon the employee’s remaining with the firm (“longevity pay” or “retention bonuses”), bonuses resulting from collective bargaining, and profitability bonuses.

Mike’s Bottom Line

During my decades with USDOL’s Wage and Hour Division (WHD), I observed that employers commonly overlook or misunderstand these provisions of the FLSA, and that virtually all bonuses paid by firms fall into the non-discretionary category.  As a result, WHD receives numerous complaints by non-exempt employees about bonus pay not being included in their OT pay. Employers found in violation of the FLSA by WHD are required to pay back wages due going back for a two- or three-year period. In addition, WHD enforcement policies often call for assessment of liquidated damages (an additional amount equal to the back wages), which is also paid to the employee. Finally, there is the potential for the WHD to assess civil money penalties, which are paid to the government. These penalties have been dramatically increased over the last year, and are now automatically reviewed annually for increases. Even if the WHD doesn’t come knocking, the FLSA allows employees to file their own private lawsuits, which can result in judgments for back pay and liquidated damages as well as court costs and attorney fees. If your organization is paying any type of bonus to non-exempt employees and is not including that bonus in overtime pay calculations, a review by an objective third party who is familiar with these provisions of the FLSA is in order. Paying attention can pay off in the long run!

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Mike Staebell

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