The holidays seem to put everyone in a giving mood, including many employers who give holiday or year-end bonuses to employees. These generous employers should be aware that certain federal and state laws, including the Fair Labor Standards Act (“FLSA”), Family Medical Leave Act (“FMLA”), Americans with Disabilities Act (“ADA”), and Iowa Civil Rights Act (“ICRA”), come into play when bonuses are handed out. Below are some guidelines employers can follow to help relieve some of the onus in the giving of the bonus.
Nondiscretionary bonuses must be included in an employee’s regular rate of pay. The FLSA requires most bonuses to be included in an employee’s regular rate of pay. Only “discretionary bonuses,” as defined by the Department of Labor’s regulations, may be excluded when calculating an employee’s regular rate of pay. Under FLSA regulations, a bonus is discretionary only if (1) both the fact that the 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 (2) the payment is not made pursuant to any prior contract, agreement, or promise that would cause the employee to expect such payments regularly. 29 CFR § 778.211.
If an employer makes an advance announcement that employees will get a holiday or year-end bonus or announces the amount of a bonus and that it might be paid, the bonus is not considered discretionary under FLSA regulations and would need to be included when calculating a non-exempt employee’s regular rate of pay. Similarly, any bonus which is communicated to employees to get them to work longer, harder, faster, or better or to induce the employees to continue their employment are not discretionary and must be included in the regular rate of pay. These types of nondiscretionary bonuses include attendance bonuses, individual or group production bonuses, bonuses for quality or accuracy of work, and bonuses contingent on employees being employed at a certain date.
Employers need to include any nondiscretionary bonuses when calculating an employee’s “regular rate” of pay during the time the nondiscretionary bonus was earned. Non-exempt employees must then be paid overtime compensation at one-and-a-half times their regular rate of pay for hours worked over 40 in a work week. If a nondiscretionary bonus was earned over a series of weeks or months, an employer may be required to prorate the bonus to the weeks or months it was earned, and determine if an employee is due additional overtime compensation for time worked during those weeks or months.
Only goal-based bonuses may be denied or prorated to employees on FMLA leave. Employers may not deny unconditional bonuses to employees on FMLA leave. Under the FMLA regulations, it is only when “a bonus or other payment is based on the achievement of a specified goal such as hours worked, products sold, or perfect attendance, and the employee has not met the goal due to FMLA leave, then the payment may be denied.” 29 CFR § 825.215. Thus, if an employer’s holiday bonus is not being paid for achieving a goal, the bonus must be paid to employees on FMLA leave.
In addition, even some goal-based bonuses may need to be paid to employees on FMLA leave. If an employer pays a goal-based bonus to employees on equivalent leave status, the employer must pay the bonus to employees on FMLA leave. For example, if an employee who used paid vacation leave for a non-FMLA purpose would receive the payment, then the employee who used paid vacation leave for an FMLA-protected purpose also must receive the payment. The same would apply to unpaid, non-FMLA leave. If an employer pays a bonus to persons on unpaid, non-FMLA leave, the employer would be required to pay the bonus to employees on unpaid, FMLA leave.
What about employees on disability leave? Employers may also need to pay bonuses to employees on long-term or short-term disability if the employer would pay a bonus to employees who are on leave for reasons other than disability. Both the Americans with Disabilities Act (ADA) and Iowa Civil Rights Act (ICRA) prohibit an employer from discriminating against an employee on the basis of his or her disability. Most employees on long- or short-term disability leave will qualify as disabled under the ADA due to the amendments to the Act by the ADAAA, which greatly expanded the definition of “disabled.” In order to avoid discriminating against employees who are on leave because of a disability, employers should exercise care in treating disabled employees who are on leave in the same manner as non-disabled employees who are on leave. So, if an employer would pay a bonus to a non-disabled person on leave, it should pay the same bonus to a person on leave due to a disability.