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The Hidden Warning About Providing Employees Certain Bonuses: Is Your Business in Compliance?

May 2014

By: Sean F. Darke, Esq.

Over the past 8 years, many Businesses changed their payroll method to include bonuses. Businesses make these changes for several reasons, but most commonly the decision is to motivate its workforce. But Businesses all too often fail to learn about the potential consequences of making such pay method change. Further, with the Illinois Department of Labor and Department of Labor increasing its audits for 2014, Businesses are on notice that they must look at their bonus structure to ensure they are properly paying their Employees.

Under the Wage and Hour laws, certain bonuses must be included in the regular rate of pay, when Businesses determine non-exempt Employees overtime. The regular rate of pay is the calculation Businesses must use to determine the proper rate of pay. Specifically, Businesses must include all remunerations provided to an Employee when calculating time and a half for hours worked over 40 hours. And this is how Businesses get in trouble-when they fail to include certain bonuses into the regular rate of pay of their non-exempt Employees.

In order to determine if a bonus is included, the wage and hour regulations provide guidance of bonuses that must be included and what can be excluded. One important key for Businesses to analyze their bonus structure is to first understand that any bonus that is discretionary does not have to be included in the regular rate of pay. Those bonuses often consist of holiday bonuses, but Businesses must understand that these bonuses must truly be discretionary. More importantly, bonuses are discretionary if the "fact that payment is to be made and the amount of the payments are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the Employee to expect such payments regularly." 29 U.S.C. § 207(e)(3)(a). So just because your Business believes the bonus is discretionary, the law might disagree with your view. If your Business has a discretionary bonus, you should discuss your specific situation with a Wessels Sherman attorney to ensure complete compliance with the wage and hour laws.

Bonuses that are not discretionary must be included in the regular rate of pay. Bonuses that must be included in the regular rate of pay include:

(1) bonuses promised to an employee upon hire;

(2) bonuses resulting from a collective bargaining agreement;

(3) bonuses announced to employees to induce them to work more steadily, rapidly or efficiently or to induce them to stay with the company;

(4) attendance bonuses;

(5) production bonuses;

(6) bonuses for quality or accuracy of work; and

(7) bonuses contingent upon the employee continuing in employment until the bonus is paid. 29 C.F.R. § 778.001, et al

What this means is if a Business provided any of the above bonuses to its Employees, the Business must include that amount in its calculation when paying the Employees any overtime.

The next big question becomes, how do Businesses calculate bonuses, when the bonus is based on quarterly or yearly performance? The question of how to calculate those types of bonuses should be discussed directly with a Wessels Sherman attorney to address your specific situation and how the bonus can be spread across a certain period of time. This article only discusses a small segment of bonuses, which is why it's critical for Businesses to discuss their specific method with a Wessels Sherman attorney to make sure their bonuses are being paid out correctly.

Questions? Call Sean Darke, Esq. - a Shareholder at Wessels Sherman's Chicago, Illinois office. Mr. Darke has successfully defended businesses in all areas of Employment and Labor laws under both State and Federal laws. Mr. Darke can be contacted at 312-629-9300 or at  sedarke@wesselssherman.com.