Benefits and Compensation

Bonuses and the Law: What You Need to Know

Bonuses are great motivators, but the legalities must be considered. Here’s what you need to think about.

The recent Daily Advisor article on bonuses prompted reader questions on how these extra sums paid to workers, at holiday or other times, are viewed by the government, both in terms of taxes withheld and in light of the Fair Labor Standards Act (FLSA).

For answers, we turned to our editors and learned we could find out in two places… one, dig through the reams of legalese put out by the IRS and Department of Labor, Wage and Hour Division, and the other, infinitely easier, look at BLR’s “everything you’d ever want to know about compensation” subscription website,”

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Needless to say, we chose the latter course and found that the site is just as strong informing on benefits and perks such as bonuses as it is on straight compensation. In either category, the site covers relevant law, best practices, and especially important if you’re competing for top talent these days (and who isn’t?), what others in your state or region, company size, and type of business are paying in salary and benefits for the same job.

Here’s some of what told us about bonuses:

–Bonuses are totally legal, from the regulatory standpoint, and can be awarded for just about any criteria you choose. Superior performance and excellent attendance are common bonus-earning behaviors. Bonuses are also used to sign on new talent, retain key talent, or motivate current workers to refer new employees.

The law classifies bonuses as either discretionary (not promised in any way and paid only if the employer decides to do so) or nondiscretionary (promised in advance as either part of the terms of employment or if preannounced qualifying criteria are met).

This is an important distinction under the FLSA. That’s because if you make such an award to a nonexempt employee, nondiscretionary bonuses must be considered as part of that worker’s compensation when calculating overtime pay.

In other words, if a worker earns $30 per hour and then gets a bonus that, averaged over the hours worked during the bonus period bumps that hourly up to $40, any time-and-a-half paid must be at $60 an hour, not $45. Discretionary bonuses, however, are not counted in the overtime calculation. The employee is paid normal overtime.

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All but the Turkey Are Taxed

From a tax standpoint, virtually all bonuses paid are to be counted as regular income, subject to income tax withholding, FICA, and FUTA, . This includes the value of significant noncash awards, such as vacation trips or prizes

But even Uncle Sam has a heart at holiday time. Low-value, noncash thank-you gifts need not be included as compensation. So that Christmas turkey you got from the boss and have likely already eaten is yours tax-free. goes on to give several best practice hints on the administration of bonus programs Among them:

–Document your bonus plan in writing and make sure it has stated goals.
–Make sure the plan clearly identifies who is eligible and under what terms.
–Explain how the plan coordinates with other company policies, including terminations. (Make sure you have not contracted to owe a bonus to a worker who has voluntarily left.)
–State unequivocally that you maintain discretion over the program.
–Review the program annually and keep it in line with current objectives.

Bonuses are one of some 70 topics covered in the website’s benefits center, which is one of three information centers the site presents. The other two cover salary and the performance appraisal process.

The site also delivers comp and benefits news, updated daily, and very likely all the forms and sample job descriptions, model policies, calculators (the turnover calculator we recently offered came from this site), and checklists you’d ever need. What’s more, the entire program is available for 14 days for free examination in your office by simply clicking the link below.

Think of it as a bonus from us to you.

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