Employers often create and implement employee bonus plans to motivate their employees to work hard and hit high targeted sales or productivity goals.  If the goal is achieved, it is a win-win situation for both parties.  The employer will see increases in productivity, sales, and employee morale, while the employee will be rewarded with a monetary bonus. However, employers must carefully weigh many considerations to reduce the likelihood of their employee bonus plans giving rise to legal actions in the future.

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The employment law lawyers of Bellatrix PC can help you determine what sort of bonus plan is most appropriate for your company, assist you with keeping your contracts compliant with the law, and represent your company in disputes with current and former employees.  Whether you would like a close review of your current or proposed policies, or you are already facing a legal complaint and need aggressive representation at trial, our attorneys are ready to assist.

To arrange for a private legal consultation with Bellatrix PC, call our law offices at (800) 449-8992 today.

Which Type of Bonus Plan is Right for Your Business?

Before selecting a specific bonus category, such as holiday or percentage of total earnings bonuses, it is important to answer the broader question of whether the bonus will be performance-based, or discretionary.

Performance-based bonuses are based on an employee’s performance, hence the name.  These types of bonuses are common in sales positions, since the goal is based on a recognizable measurement, or objective criteria, such as a sales quota.  It is very easy to determine whether or not the employee hits the goal or not.

If the employer chooses to include the bonus plan in the employment agreement or offer letter, it is important to clearly define (1) the goal for the employee, and (2) how, when, and in what amounts the bonus will be paid if that goal is reached.

Discretionary bonuses are those which the employer may or may not pay at his or her discretion.  This means that the employer must treat each employee in a similar fashion, but is not required to pay any individual employee a bonus. If properly arranged, this type of bonus structure will typically provide a robust defense against breach of contract allegations stemming from bonus nonpayment.

Compliance with Fair Labor Standards Act Regulations

The most common employment act which comes into question in bonus plan disputes is the Fair Labor Standards Act, or FLSA.  While the FLSA does not consider bonuses illegal, it does make certain provisions when it comes to how employees’ may be compensated for working overtime.

In general, the FLSA requires that all non-exempt employees be paid overtime at a rate of one and a half times their regular rate for all hours worked over 40 in a workweek.  The “regular rate” is the rate at which overtime is calculated, and includes more than just your employee’s normal salary or hourly rate.  Subject to a few exclusions, the “regular rate” actually encompasses all compensation provided to the employee as part of his or her employment.

A good rule of thumb is that any bonus given to an employee as a means of inducing superior performance, productivity, attendance, or quality must be included in the regular rate.  As with any rule, however, it comes with some exceptions: holiday bonuses, discretionary bonuses, and percentage of total earnings bonuses. These exceptions are discussed in greater detail below.

Special Exceptions to the FLSA

Holiday bonuses are permitted by the FLSA.  The bonus may be excluded from the regular rate of pay as long as the amount of the bonus is not dependent on hours worked, production, or efficiency.  However, the gift or holiday bonus may not be so large that the employee considers it part of his or her wages, rather than a bonus.

As mentioned above, employers often use discretionary bonuses to reward employees for perfect attendance, hitting goals, high levels of productivity, completing large projects, and other outstanding accomplishments.  Discretionary bonuses do not increase the employee’s regular rate of play.  The key is for the employers notto announce the amount of the bonus until or near the end of the period for which the bonus was given, which negates the bonus acting as a motivator.  It is not prudent to continually give discretionary bonuses on a regular basis, because once an employee comes to expect a discretionary bonus, it may no longer be truly categorized as “discretionary.”  While there are no laws explicitly stating how to calculate a discretionary bonus, the FLSA states that it must be included in the employee’s regular rate.

In contrast to holiday bonuses and discretionary bonuses, percentage of total earnings bonuses incorporate overtime. Since the employee is already being paid for overtime worked during the bonus time period, the employer is not required to pay any additional overtime.

While bonuses are designed to reward employees, it is important to make sure your business is protected as well. The employment law attorneys of Bellatrix PC can help your business create bonus plans that maximize effectiveness, while simultaneously protecting your company’s bottom line and helping to prevent lawsuits.  We can walk you through the steps of drafting a bonus plan, create a personalized plan for your employees, or analyze your existing plan with our business risk review.  Should litigation arise, our attorneys are prepared to represent you at every stage of the process — even if it means going to trial.

To schedule a confidential consultation and learn more about how we can help, call the attorneys of Bellatrix PC at (800) 449-8992.

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