07/10/2002

20. The differences between a discretionary bonus and a non-discretionary bonus

There are two kinds of bonuses - "discretionary" and "non-discretionary". If the bonus you pay meets the qualifications of a discretionary bonus, then the "time-and-one-half" requirements of the Wage-Hour regulations must be adhered to.

What is a "discretionary bonus"? If payment of a bonus and the amount to be paid is determined entirely by the employer at or near the end of the period covered by the bonus, then the bonus does not become a part of the base rate of pay. No overtime has to be paid on this type of bonus, provided there is no agreement, contract, or promise which leads an employee to expect to receive regular bonuses. This type is thereby classified as a true gift in that there is no connection between the bonus and the employment relationship, hours worked, or individual efficiency.

What is "non-discretionary" bonus? If an employer has promised his employees a bonus to encourage rapid, efficient work, as an inducement to remain with the employer, or as a "share" in net profits, then the bonus must be paid and the employer cannot exercise any discretion as to whether to pay or not to pay a bonus. This is a "non-discretionary" bonus and it must be included with the regular rate of figuring overtime pay. When it is determined what the amount of the bonus will be, it must be allocated back over the work period in which the bonus was earned.

An example of the correct method of figuring an incentive type bonus would be as follows: (In this example, we will assume that the individual works 44 hours per week and is paid a base hourly wage of $5.15 per hour).

The employee's basic weekly wage would be $5.15 x 40 hours, or $206.00
The employee's overtime wages due would be $7.72 x 4 hours, or $30.88
The employee's total weekly wages would be $206.00 + $30.88, or $236.88

(We will now assume the employee's total bonus was $75.00 during a 3-month period).

Step 1: Figure the bonus hourly rate as follows: Total hours worked weekly multiplied by the number of weeks in a covered 3-month period...44 x 13, or 572.

Of the 572 total hours worked, 4 hours per week were overtime hours.

Thus, the overtime hours during the bonus period would be as follows:
4 x 13, or 52 overtime hours.

Divide the total number of hours worked during the 3-month period (572) into the $75.00 bonus...results, $13.11 is your bonus hourly rate.

Step 2: In addition to paying the straight-time bonus, you must figure and pay the half-time bonus due on overtime hours. In this example, the total overtime hours worked is 52. As you have already determined the employee's straight-time bonus, the only item remaining to be computed is the over-time bonus. Compute the overtime bonus as follows: 52 x of bonus hourly rate ($13.11) , or of $13.11 is $6.55. Now, merely multiply 52 x 6.55 cents, or $3.41.

Step 3: Add your overtime bonus of $3.41 to your straight-time bonus of $75.00 and your total is $78.41.