The holidays are just around the corner! It’s exciting, but there are many pitfalls for employers in the wage and hour arena. In this article, I will address two holiday issues important for employers to understand: holiday bonuses and gift cards.
Many employers offer their employees holiday bonuses. This is a generous gift for employees, but employers are often confused if this additional money needs to be included when calculating overtime for nonexempt employees.
Under the federal FLSA, bonus payments are divided into discretionary and nondiscretionary types.
Nondiscretionary bonuses are included in an employee’s regular rate of pay for the purpose of determining overtime, while discretionary bonuses are not included in an employee’s regular rate of pay to determine overtime.
Bonuses are discretionary if:
- Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer; and
- The bonuses are not paid under any prior contract, agreement, or promise causing the employee to expect such payments regularly.
Bonuses are nondiscretionary if the employer promises, contracts, or agrees to pay a bonus to the employee.
The FLSA provides for several narrow exemptions from the requirement that bonuses be included in an employee’s regular rate of pay. The onus is on the employer to prove that a payment meets one of the exemption requirements.
The exemptions include, among other things, gifts or payments in the nature of gifts made at holiday 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. Also vacation pay and holiday pay are exempt from inclusion in overtime.
Many employers also offer holiday gift cards to their employees. If an employer gives its employees $35 gift cards--for example, to the grocery store or a shopping mall--the gift will be treated as income and is subject to payroll taxes and withholding, along with the rest of the employees’ income.
Many employers are in violation of this rule, especially around the holidays, because they assume the gift falls under the de minimis rule. De minimis fringe benefits are not taxable, because they are not considered cash. For example, if a company gives its employees a coupon specifically for a free turkey or a ham at a particular store during the holiday season, this falls under the de minimis rule and is not taxable.
Gift certificates that can be used like cash do not fall under the de minimis exception. If the employer gives its employees a $25 gift card to the same store, but not specifically for a turkey or ham, the gift card is taxable as income.
So be generous this holiday season, but know the rules!
Holiday and Employee Bonuses Resources:
Susan E. Prince, JD, is a Legal Editor for BLR’s human resources and employment law publications. Ms. Prince has several years of experience as an attorney and writer in the field of human resources and has published numerous articles on a variety of human resources and employment topics, including compensation, benefits, workers’ compensation, discrimination, work/life issues, termination, and military leave. Ms. Prince also served as an expert on several audio conferences discussing the 2004 changes to the federal regulations under the Fair Labor Standards Act. Before starting her career in publishing, Ms. Prince practiced law for several years in the insurance industry and served as president of a retail sales business. Ms. Prince received her law degree from Vermont Law School.
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