We get many questions regarding how to issue bonus pay correctly. Unfortunately, long gone are the days that you can merely cut a check without worry. Now, the Department of Labor (DOL) classifies bonus pay into two primary legal categories. The DOL of course dictates the legal parameters of paying workers in the United States. Understanding these two types of bonuses as determined and set forth by the DOL will ensure you are legally compliant when issuing bonuses to your hard-working employees.
Why Issue Bonuses At All?
Before delving into the two categories of bonuses according to the DOL, it’s important to understand the reason behind bonuses in the first place. In many cases, employers use bonuses as a way to reward hard-working employees who have gone above and beyond the call of duty. It is perhaps a way to pay employees extra if the company has had a good year, financially and the owners want to “share the wealth.” It is a good alternative to raising the hourly or salary pay of an employee because it can be a fluid amount. In other words, if you increase someone’s salary— the amount they expect to get paid each and every paycheck— then you can’t just reduce it because your company is struggling, or you just decide you don’t want to give them the higher rate any longer, or if you do change it, it’s a pay cut! A bonus gives you the ability to reward an employee without altering their take-home pay.
In addition, in today’s ultra-competitive employee market, it can be harder and harder to find new employees or even retain the ones you already have. Issuing some sort of bonus pay program can be a way to keep your hard-working employees feeling appreciated along with help you entice new hires to come into the fold. Bonuses are a good addition to a well-rounded company to be sure, but they must be issued correctly to avoid any trouble with the Department of Labor.
What You Need to Know About Bonuses to Ensure DOL Compliance
The benefits of bonuses for company morale and employment retainment are without question as we have just considered. However, you do want to make sure you are doing everything on the up-and-up and are above board in terms of compliance with all the DOL regulations and definitions. To help you with this, we have broken down the two types of bonuses according to the DOL and explained a bit about each. Each of these categories are relevant in regard to how they affect overtime pay for non-exempt employees:
- Discretionary Bonuses: This type of bonus is not tied to any sort of formal bonus program. Employees do not “expect” them or depend on them. They are unrelated to their performance metrics. A great example of this type of bonus is a Christmas bonus. These types of bonuses are not required to be included in the overtime calculation.
- Non-Discretionary Bonuses: This type of bonus is most often tied to a formal bonus plan or program and is often very much connected to individual performance. A good example of a non-discretionary bonus is a production bonus. These types of bonuses are legally required to be included in overtime calculation.
Bottom Line: Learn What is Compliant & What Isn’t Before Issuing Bonuses
Contact TPC to learn more about how to avoid Department of Labor audits or problems regarding improperly issued bonuses. Bonuses are a great incentive to keep employees happy and to obtain new candidates. However, they must be issued with DOL guidelines in mind. Contact TPC to learn more specifics on how to create a bonus program that is DOL compliant and will not result in any legal issues down the road.
