Benefits And CompensationHR Management Compliance

Bonus Protection: Discretionary vs. Nondiscretionary


Many corporations yearly put together enterprise objectives and set up incentives for workers if the objectives are met. One frequent incentive is the quarterly or annual bonus. Whereas the reward course of appears easy, it could possibly include sudden obligations and sophisticated calculations beneath the Truthful Labor Requirements Act (FLSA). Let’s take a better take a look at precisely which bonuses have to be included once you’re making the calculations.


Discretionary vs. Nondiscretionary Bonuses

Many employers view bonuses as additional funds to staff they aren’t obligated to supply. Accordingly, they don’t take into consideration the potential FLSA implications.

When an worker works time beyond regulation in a given week, the FLSA requires the time beyond regulation fee to be calculated based mostly on the common pay fee, which incorporates with a couple of notable exceptions any and all compensation paid to an worker in a specific workweek, not simply the hourly wage. Whether or not bonuses paid to staff have to be included within the common fee calculation activates whether or not the bonuses are discretionary or nondiscretionary.

Discretionary. Based on the FLSA rules and DOL steerage, discretionary bonuses don’t should be included within the common fee calculation. To be deemed discretionary, nevertheless, all the following necessities have to be met:

  • The employer should have the only discretion at or close to the time of cost to find out whether or not to pay it;
  • The employer should have the only discretion at or close to the time of cost to find out the bonus quantity; and
  • The bonus isn’t paid in keeping with any earlier contract, settlement, or promise inflicting an worker to count on such funds commonly.

Examples from the DOL of bonuses which may be deemed discretionary embody these paid to staff for overcoming a difficult or aggravating scenario or making a singular effort and never based mostly on beforehand established standards. Assuming all three necessities have been glad, the examples might embody the COVID-19 bonuses that many employers paid to staff in 2020 in recognition of the distinctive challenges and stress the pandemic introduced and the employees’ efforts to cope with them.

Nondiscretionary. Any bonus that doesn’t meet all the necessities to be discretionary is by default nondiscretionary, the DOL’s steerage says. Listed here are some  examples:

  • Bonuses based mostly on a predetermined components;
  • Bonuses paid for high quality and accuracy of labor;
  • Bonuses introduced to staff to induce them to work extra effectively;
  • Attendance bonuses; and
  • Security bonuses.

The frequent thread working by means of all the bonuses is that they aren’t discretionary about both (1) the very fact of cost (i.e., the employer has made a earlier contract, settlement, or promise inflicting an worker to count on them) or (2) the quantity of cost (i.e., the quantity was decided effectively prematurely of the time of cost). On the latter level, the DOL explains “the understanding of how an worker earns [a bonus] could result in an expectation to obtain [it] commonly.”

fifth Circuit Case

Whatever the arguments you would make in opposition to the DOL’s logic, it’s the present normal, which was just lately utilized in a ruling by the U.S. fifth Circuit Courtroom of Appeals (the courtroom with jurisdiction over federal circumstances in Mississippi).

The fifth Circuit determined a efficiency bonus have to be included within the common pay fee as a result of the quantity was predetermined, despite the fact that the employer retained the discretion on whether or not to pay it in any respect. The opinion was later withdrawn for solely unrelated causes, nevertheless it serves pretty much as good indication of how the courtroom would rule in future circumstances.

One caveat: Whereas it most likely goes with out saying, it’s best to bear in mind the label given to a bonus has no bearing on whether or not it’s really discretionary or nondiscretionary. A bonus labeled as discretionary however that doesn’t fulfill all the statutory necessities is definitely a nondiscretionary bonus, and you will need to account for it within the common pay fee throughout time beyond regulation weeks.


The difficulty of bonuses and their potential FLSA implications is only one compliance difficulty you face and may check out sooner quite than later. Hopefully, taking the time to verify compliance early within the 12 months will result in higher occasions later.

Martin J. Regimbal, a shareholder of The Kullman Firm, might be reached at [email protected]. Additionally contributing to the article was Stephen L Scott, an lawyer on the agency, who might be reached at [email protected].

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