Employers are generous but sometimes uninformed in December, handing out holiday gifts and bonuses without realizing the legal consequences. As an employer, you have to consider the tax and compensation consequences of your gifts. Bah Humbug!

The Fair Labor Standards Act divides bonuses into two categories: discretionary and non-discretionary. Discretionary bonuses must be decided in the employer’s sole discretion. They cannot be earned by any formula or used as a motivator or incentive. If they are truly discretionary (which is up to the employer to prove), cash bonuses do not have to be rolled into an hourly employee’s regular rate of pay on which overtime is calculated.

Holiday bonuses may be discretionary if they just fall like manna from heaven onto the employee without the employee knowingly working towards the bonus.   Generally, the amounts, timing and basis for the discretionary bonus should not be announced in advance to avoid the appearance of being an incentive.

If the holiday bonus is earned by the employee by meeting certain announced criteria, Continue reading Holiday Gifts and Bonuses Can Trip Up Employers →