12 Days of HR: Santa Claus is Comin’ to Town and Here’s What You Better Watch Out For When It Comes to Holiday Bonuses
He’s making a list and checking it twice—you know the drill: Santa’s game is that he rewards good behavior during the year with gifts under the tree. And when it comes to employees, the most requested item on their list continues to be holiday bonuses. Maybe your company is feeling the Santa-spirit and planning to reward employees with a little something extra this year. If so, here’s a few pointers to keep in mind when divvying up that holiday cheer.
One issue that arises when it comes to holiday bonuses is whether the bonus could affect a non-exempt employee’s rate of overtime pay. The Department of Labor’s regulations specifically address the issue, stating that “‘regular rate” shall not be deemed to include ‘sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.”
Accordingly, the two key questions to consider are whether the bonus is discretionary and for what purpose the bonus is being given. For example, is a holiday bonus given because the employee’s contract guarantees a specific end-of-year bonus? If so, the bonus is probably not discretionary, considering that the employee could sue to enforce that contractual right. What if the bonus is directly based on an employee’s hours worked or production during the year? According to the DOL regulations, the bonus would likewise not be excludable because it would no longer constitute a gift. Another situation where the bonus might not be excludable is where the bonus is “so substantial that it can be assumed that employees consider it a part of the wages for which they work”—again, that removes the bonus from classification as a gift. Finally, note that even if holiday bonuses are paid with regularity and your employees have come to expect them (looking at you, Clark Griswold) or are paid to different employees or groups of employees in varying amounts based on factors like their length of service or base pay, the bonuses may nonetheless be excludable from an employee’s regular rate.
Another issue to keep in mind is that even if a bonus is excludable from an employee’s regular rate, it is still considered compensation for the employee and will be taxed accordingly. Make sure to account for the proper withholdings when the bonus is given. It might be helpful to allow an employee to customize withholdings for the bonus or to coordinate a deposit of the bonus into a Health Savings Account, Flexible Spending Account, or IRA, subject to annual caps on contributions. Consider consulting your employees to determine which option work best for them and their families.
Please feel free to contact a member of the Verrill Dana Labor & Employment Practice Group with any questions that you may have on holiday bonuses in the workplace.