Santa May Owe His Elves Overtime on Those Year-end Bonuses

December 3, 2019

The December holidays and year-end pay issues raise a number of wage and hour and leave challenges for employers. Many businesses give holiday gifts or year-end bonuses to their employees. If the bonuses aren’t handled properly, you could expose your company to overtime liability. Additionally, while Wisconsin employers aren’t required to pay employees for holidays on which they don’t work, many do so. How does holiday pay affect overtime liability, and what happens if an employee works on a paid holiday?

Holiday Gifts, Bonuses

Holiday gifts and bonuses are common rewards that employers give to employees for services provided during the year. But as we all learned from the movie National Lampoon’s Christmas Vacation, holiday bonuses can create various problems. Clark Griswold was expecting a large bonus that would allow him to install an inground swimming pool. Instead, he received a membership to the Jelly-of-the-Month Club, resulting in the kidnapping of his boss and a Christmas visit by the local SWAT team.

While actual concerns with holiday gifts and bonuses aren’t quite so dramatic as in the movies, they can raise wage and hour liability problems for employers. Federal and state wage and hour laws recognize that an employer can provide a holiday gift or bonus to employees without incurring possible overtime liability. The amount of the holiday gift can vary based on the length of the employee’s service. For example, you can pay a holiday gift or bonus of $25 to employees with less than three years of service, $50 for three to five years, and another $10 for every additional five years of service. The holiday gift amount cannot be measured or dependent on hours worked by the employee or based on production or efficiency.

The holiday gift or bonus amount cannot be so substantial that the employee would consider it to be part of his wages. Griswold intended to install the in-ground pool with his bonus. Such an amount wouldn’t pass legal muster as a holiday gift. Payment of a holiday bonus cannot be pursuant to a contract. It must truly be a gift or in the nature of a gift.

If your gift or bonus doesn’t qualify as a holiday gift, the next question is whether it’s a discretionary bonus. If it is, then the amount of the bonus doesn’t need to be included in compensation for determining the employee’s regular rate of pay and additional overtime owed.

Discretionary bonuses are a narrow exception to the rule that all payments to employees must be included in their total compensation. A discretionary bonus cannot be offered at the time of hiring. It can not be made pursuant to any contract. Both the fact and the amount of the bonus must be at the sole discretion of the employer. If you have paid a bonus for many years but the amount has varied, you will have a difficult time showing that it’s discretionary just because the amount changed over the years. Bonuses for production, retention, the quality or quantity of work performed, or attendance aren’t discretionary.

So, what if your bonus doesn’t qualify as a holiday gift or discretionary bonus? It means that for every week in which your employee worked overtime during the period covered by the bonus, you will have overtime liability.

By way of example, let’s say you give your employee a year-end annual bonus of $1,040 that turns out not to be a holiday gift or discretionary bonus. The $1,040 amount must be divided by the 52 weeks it covers, yielding $20 per week. For any week in which the employee earned over time, you must go back and add the $20 to his total compensation for that week and then divide the new total compensation by hours worked during that week, yielding a regular rate of pay. You owe the difference between half time paid at the previous regular rate and half time at the revised regular rate for overtime hours worked in all workweeks in the year when the employee worked overtime.

If you intend to give a holiday gift to your employees, make certain the amount isn’t substantial, don’t tie the bonus to production, hours worked, or efficiency, and be sure there is no contractual obligation to provide it. If your year-end bonus doesn’t qualify as a holiday gift, it will likely be an uphill battle to establish that it was a discretionary bonus.

Holiday Leave and Holiday Pay

Neither federal nor Wisconsin law requires an employer to provide paid holidays to employees. Nevertheless, most employers offer a set of paid holidays. A business may be closed on the holiday, or if the holiday falls on a non-workday such as a Sunday, the employer may close the following Monday.

If you provide holiday pay and the employee doesn’t work on the holiday, the paid hours are not considered hours worked for overtime purposes. For example, suppose your workweek begins on Sunday at 12:01 a.m. and ends the following Saturday at midnight. Your employee works eight hours per day on Monday, Wednesday, Thursday, Friday, and Saturday and receives holiday pay on Tuesday for Christmas. In that instance, you owe no overtime for the workweek. The employee will have “worked” only 40 hours. You will owe 48 hours of straight time, but no overtime.
What if the employee works on a holiday? Neither federal nor state law requires any type of premium pay, such as time and a half or double time. If you’re unionized, your collective bargaining agreement may require premium pay. Additionally, many employers include premium pay provisions in their handbooks for employees who work certain holidays. Remember, you may owe an employee who works the holiday overtime pay if the number of hours worked that week exceeds 40. That would be the case regardless of whether the hours worked over 40 were on a holiday or in a workweek in which there was no holiday.

If an employee takes off work as a religious accommodation, you aren’t required to pay her for that day. Of course, you can’t discriminate against employees by paying for time off as a religious accommodation for one religion but not another. Some employers allow for floating holidays so employees can use a paid holiday for Christmas, Hanukkah, Kwanza, or other religious days or events.

One question that often comes up is whether an employer must pay an employee for attending a holiday party outside of regular business hours. If you require attendance at the event, you must pay the employee for the hours. If the party is outside of regular business hours, the best practice is not to mandate attendance.

Bottom Line

There are a variety of wage and hour issues and traps for the unwary relating to holiday pay, bonuses, and leave. Wage and hour questions are frequently less intuitive and more complex than other employment areas such as discrimination and harassment. Making a mistake in the wage and hour context may affect much of your workforce and result in significant liability.

This article, slightly modified to note recent updates, was featured in the December 2018 issue of the Wisconsin Employment Law Letter, which is co-edited by Axley Brynelson Attorneys Saul Glazer and Michael Modl and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

For more information about "Santa May Owe His Elves Overtime on Those Year-end Bonuses," contact Michael J. Modl at mmodl@axley.com or 608.283.6702.