by Alan B. Graves
Employee bonuses sound like a great thing if your company can afford it. The bonuses are given for a variety of reasons: motivating employees, showing appreciation, or trying to help boost company morale. By definition a bonus is something “extra” and an employer is not required to pay a bonus to employees. However, bonuses are governed by state and federal wage and hour laws. Specifically, in California employers need to be aware of how bonuses may impact wage-hour calculations and tax implications.
Are Bonuses “Earned”? An employer may provide an employee bonus which is either “earned” or “unearned.” For example an employee may earn a bonus if they work a certain number of hours in a year, bring in a specific amount of new business, or based on the company making a profit. When there is a set criteria an employee has to meet, then the bonus is earned once the criteria is met.
An unearned bonus, is not really unearned, but more commonly referred to as a “discretionary” bonus. A discretionary bonus provided to an employee, is just that, something an employer is not obligated to provide and can give to any employee for really no rhyme or reason, generally out of appreciation, loyalty, or good service.
Whether a bonus is discretionary or based on specific criteria, both are considered “wages” under California Labor Code. As such when paying a bonus employers must make sure the bonus is timely paid (See Labor code Section 204). Typically this means when a bonus is earned it must be paid on the payday that applies to that pay period. Another matter which may complicate paying a bonus is the impact earned bonuses may have on calculating an employees overtime. (See discussion below) Further, all cash bonuses must be taxed as well as most non-cash bonuses should be taxed based on the value of the bonus.
Bonuses and How it Affects Overtime Calculations – Most people think of overtime rate of pay as taking the employee’s hourly rate and then multiply by 1.5. Generally that holds true. However, a closer examination makes this calculation a little more complicated. Employee overtime is calculated based on a “regular rate” of pay. The regular rate of pay includes both an employees base pay (such as hourly rate) plus commissions and most bonuses. Inclusion of commissions and most bonuses in calculating overtime is based on public policy for fear an employer might pay a lower hourly rate and offer higher bonuses.
Look for Part 2 of this important article on ‘Bonus Pay in California for Non-Exempt Employees: Make Sure You Do It Right’ in our July issue.
Alan B. Graves is an associate Neil Dymott. His areas of practice include business litigation and labor and employment law. For further information, Mr. Graves can be reached at (951) 303-3930 or agraves@neildymott.com.