Practice Areas

Discretionary Bonuses: What Are They, and Why Should You Care?

The federal Fair Labor Standards Act defines a “discretionary bonus” as a sum paid by an employer in recognition of an employee’s services during a given period of time (for example, a calendar year) if:

  • the very fact that the bonus payment is to be made and the amount of the bonus payment are at the sole discretion of the employer at or near the end of the period; and
  • the bonus payment is not issued according to any contract, agreement or promise that causes the employee to expect the bonus.

Put more simply, a discretionary bonus is typically one that an employee would have no reason to expect to receive from an employer.

Consider the following examples:

  • If an employer announces to employees in January that it intends to pay them a bonus in June, the employer has abandoned its discretion regarding the fact of payment by promising a bonus to its employees, and such a bonus is non-discretionary.
  • If an employer promises to sales employees that they will receive a monthly bonus computed on the basis of allocating five dollars for each item sold whenever, in the employer’s discretion, the financial condition of the company warrants such payments, the employer has not abandoned discretion with regard to the fact of payment, but has abandoned its discretion with regard to the amount of the bonus. Such a bonus is also non-discretionary.

The difference between discretionary and non-discretionary bonuses matters because non-discretionary bonuses must usually be included in any overtime pay that may be owed to a non-exempt employee.   This is the rule under federal law and under New York law, and it may be the rule in other jurisdictions as well.

The overtime calculation is a relatively simple calculation if the bonus covers only one weekly pay period.  However, under many bonus plans, the bonus covers a period of time longer than a workweek.  In the latter scenario, the bonus must be apportioned back over the workweeks of the period during which it may be said to have been earned, and an employee must receive additional compensation for each workweek that he/she worked overtime.

Where it is impossible to allocate the bonus among workweeks of the period in proportion to the amount of the bonus actually earned each week, some other reasonable and equitable method of allocation must be used.  If you are uncertain of what that method should be, or how to calculate overtime payments in general, you should consult an employment lawyer knowledgeable about the wage-and-hour laws where you conduct business.