November and December bring the holiday season when employees are busy shopping for gifts for family and friends and employers are tallying up the year-end reports. While some employers give employees bonuses throughout the year, bonuses are most frequently doled out to employees around the holidays and end of the year. Employers may believe that a bonus is simply a one-time payment showing appreciation for the employee or rewarding the employee’s performance or attendance. However, financial bonuses or awards given to employees are subject to federal employment and wage laws, including tax laws and the Fair Labor Standards Act, may affect overtime pay, and may even be considered in wage payment claims.
Types of Bonuses
Employers may choose to offer or pay employee bonuses to reward performance, for profit sharing, for gain sharing, or just as goodwill. Bonuses may be contractual or discretionary, and the nature of the bonus can have broad implications.
Contractual bonus payments
Promised bonuses may be construed as contracts to pay. Senior executives, in particular, may have employment agreements that require they be paid bonuses. Executive bonuses are typically dependent on the company’s metrics and performance, including revenue targets, or may be based on other criteria like employee retention.
Sales commission may also be considered a contracted bonus, even if the payment is referred to as commissions. Sales commission payments differ from other bonuses because they are directly tied to sales performance and not usually anything else. They may differ from performance-based bonuses because commission structure is often outlined in the employee handbook or an employment contract and is thus considered a contracted bonus rather than a discretionary bonus. An employer may also choose to pay discretionary bonuses in addition to the contracted sales commission bonus if an employee’s sales metrics are exceptional.
Discretionary bonus payments
Most bonus or award payments are discretionary. Discretionary bonuses can also be broken down into performance-based bonuses and random bonuses, which are fairly self-explanatory. Performance-based bonuses tend to be established on personal performance, company goals, or pay grade. Random bonus payments are just that – randomly given without regard to performance or metrics. Holiday bonus payments are a type of random bonus. They are not contracted, nor are they listed in the employee handbook as being tied to performance.
An employer may choose to withhold the payment of a discretionary bonus so long as the choice to withhold the bonus is not irrational or discriminatory. For example, an employer may not withhold a bonus from a woman because she was absent on maternity leave when bonuses were administered.
In South Carolina, employers that pay bonuses or awards to employees must notify employees of the time when the payments will be made. A South Carolina Court of Appeals decision held that employers violated the wage payment act when they did not set time for the payment of bonuses but relied on “target dates.” This case is an indicator to employers that they should not hold the promise of a bonus, contracted or discretionary, over the employees without providing a reasonably firm timeframe on when the bonus will be paid.
Impact on Overtime
Employees who are not exempt under the FLSA must be paid at a rate not less than one- and one-half times their regular pay rate for all hours worked over 40 hours in one week. For a refresher on overtime rules, go back and read this journal entry. A non-exempt employee’s regular rate of pay is not just his or her hourly pay rate, but also includes other forms of compensation, such as salary, gifts, discretionary bonuses, profit sharing bonuses, and pay for unworked time such as vacation pay.
Section 7(e) of the Fair Labor Standards Act (FLSA) requires employers to count nondiscretionary bonuses in the employee’s regular rate of pay when calculating overtime. Nondiscretionary bonuses are defined by the FLSA as those that are announced to employees to encourage them to work more efficiently or those designed to increase employee retention. In the eyes of the FLSA, few bonuses are discretionary, permitting exclusion from overtime rate consideration. Referral bonuses for the recruitment of new employees are exempt from inclusion in the regular rate of pay if: 1) participation is voluntary; 2) recruitment efforts do not involve a significant amount of time; AND 3) the activity is limited to after-hours solicitation as a part of the employee’s social affairs.
For example, if a company promised and gave hourly-paid non-exempt employees a $2000 bonus to remain employed with the company for 6 months, the $2000 bonus must be considered as if it were paid over the 6-month period with the employee’s regular hourly rate when calculating the overtime pay rate for the employee.
When is a Bonus Earned in South Carolina?
An employer is required to pay an employee wages the employee earned before he or she was discharged, whether the employee separated from employment voluntarily or involuntarily. These wages may include bonuses or commissions. Employers must review their bonus programs in the employee manual to determine whether employees are still due bonuses after they are discharged. If the employee handbook or manual indicates when a bonus or commission is earned and due, the employer must honor the terms set forth in the handbook. Bonuses that are purely discretionary would likely not be considered wages to be due once an employee is terminated. If the bonus an employee is anticipating is related to performance, sales, or other metrics, the employee may well be entitled to the bonus, or a portion of it, regardless of whether the employee departs from the employer voluntarily or involuntarily.
Wage Payment Claims in South Carolina
The South Carolina Payment of Wages Act (SCPWA) is the state law that outlines requirements that employers must follow regarding employee wages. In addition to a business being responsible for unpaid wages, an owner of a business can be personally liable for unpaid wages due an employee. The stakes for employers and business owners are high to ensure employees are paid properly.
Particularly when an employee is paid on a commission basis, employers may be responsible for paying commissions or bonuses to employees even after their employment has terminated. However, a bonus that is purely discretionary, like a holiday bonus, would not likely be considered wages and due upon termination. An employer needs to be mindful of the employment handbook that the employee signed as unused leave may be required to be paid out as a final bonus to the employee.
We Can Help
The South Carolina employment lawyers at Gignilliat Savitz & Bettis, LLP have years of experience representing employers in wage claims, crafting employers on employee handbooks or manuals, and advising employers on bonus and commission payments. If your employees have the opportunity to earn bonuses or commissions, contact an attorney in our office to review your procedures and policies and ensure compliance with state and federal wage laws today.