Holiday bonus – pros and cons
Minding Your Business

Holiday bonus – pros and cons

Alex Myers

Alex Myers of Myers & Associates will take over the legal advice column "Minding Your Business." He specializes in business law.

Dear Alex:

Our business has a long history of giving holiday bonuses to our employees.

We take pride in the care we have for our employees, and the tradition of bonuses is one of our favorite ways to show appreciation to them.

We used to do our own payroll, but this year we started using a company to do our payroll due to the complications that have grown over the years.

Now, our new payroll company has told us that we might be creating a problem with the bonuses, because of overtime rules.

How can this be?

Holiday bonuses are a great way to show appreciation to employees, engender good relations and loyalty and reward a job well done. I hope you will continue to keep this tradition alive.

Unfortunately, there is a possibility that holiday bonuses can result in several problematic situations for employers, including wage-and-hour liabilities for employers who aren’t careful.

The problem can arise when categorizing what you call a “bonus.”

If the bonus is not truly discretionary, then the bonus gets lumped into the employee’s regular rate of pay.

For example, a bonus is not discretionary if it is promised as part of the employee’s compensation. This increase in calculating the regular rate of pay carries into the calculation of overtime wages.

Overtime wages are calculated based upon a multiplier of the employee’s regular rate of pay. So if you have undervalued the regular rate of pay by failing to include the bonus during the year, you may have liability for underpaid overtime wages.

Thankfully, if your bonuses are truly discretionary bonuses, they may not be considered a part of the employee’s regular rate of pay, and thus may not result in any change to calculating overtime.

To be truly discretionary, the employee cannot have a contractual right to a bonus, and the employer must have full discretion over whether a bonus will be paid at all, If a bonus is to be paid, the employer must have discretion over the amount to be paid.

This means that bonuses tied to objective metrics such as performance, attendance, or tenure, can be problematic.

Another area of potential unintended consequences for discretionary bonuses is in the equal and fair treatment of all employees.

Discretionary, subjective bonuses are ripe for a claim of discrimination for disparate treatment among employees.

If you award two employees of similar standing with different bonuses, rather than creating goodwill and loyalty among your employees this could become divisive, resulting in resentment, fracturing functional teams, and possibly claims of discrimination.

At a minimum, keep holiday bonuses consistent among job types, if not uniform among all employees.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

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