When it comes to employee compensation, understanding the difference between discretionary and non-discretionary bonuses is crucial for both employers and employees. Knowing how these two types of bonuses differ can help companies effectively motivate their workforce and ensure compliance with wage and hour laws.
Here is everything employers and employees need to know about discretionary and non-discretionary bonuses.
There are many different bonus options that employers can utilize in their business. The most commonly known and used bonuses are Discretionary Bonuses and Nondiscretionary Bonuses. It is important for employers to understand the difference between both bonus types to know when to use them, and the requirements surrounding them.
Discretionary bonuses are typically awarded to recognize exceptional employee performance. These bonuses are often a one-time payment.
The key to discretionary bonuses is that they are offered at the sole discretion of the employer. Employers should avoid any form of advance notice and avoid guaranteeing or alluding to the expected payment of a bonus. The amount of the bonus and the timing of the bonus are not known in advance.
Discretionary bonuses are excludable from the regular rate of pay and may not be credited toward overtime compensation owed to an employee.
Overall, the following requirements must be met, according to the Federal Department of Labor:
Employers may award an employee a discretionary bonus for a variety of reasons, including:
A nondiscretionary bonus is offered by an employer if employees meet certain requirements. These are usually standing offers that help incentivize better performance in the workplace.
When employers offer nondiscretionary bonuses, they usually designate specific conditions to be met and a set amount to be paid. In other words, the employee knows about the bonus and expects it.
However, it is important to set clear expectations of how the employee earns the bonus. The employer does have the option to not pay the bonus, but only if the employee does not meet the requirements set forth by the employer to be awarded the bonus. This does not make the bonus discretionary.
It is strongly recommended that when putting together a nondiscretionary bonus plan to include an employee eligibility clause. An eligibility clause, for example, could specify that employees must be an active employee in good standing to receive the bonus.
Nondiscretionary bonuses are usually included in the regular rate of pay for non-exempt employees.
Examples of Nondiscretionary Bonuses that must be included in the regular rate includes the following:
Sums paid as gifts and payments in the nature of a gift made on a special occasion/holiday as a reward for service may be excluded from the regular rate for non-exempt employees, given that the amount of the gift/payment is not measured by or dependent on hours worked, productivity, or efficiency. Gifts, just like bonuses, are considered a form of income by the IRS and can be taxed as such.
Keeping track of and managing employee bonuses can be a real headache for any HR manager. Employers struggling with managing employee bonuses should consider looking to a New York payroll and HR company with a compensation management solution to help reduce administrative burdens and minimize the risk of error in manual data entry.
If you are interested in learning more about the available solutions through a New York payroll and HR company, please contact us today.