The holiday season is upon us, and many workers are looking forward to receiving a Christmas bonus. Depending on the nature of the bonus, it may or may not have an effect on employees’ overtime rates.
In most cases a Christmas bonus is essentially a gift from management. The bonus amount is not agreed upon in advance and is not based on specific criteria. This kind of bonus is not included in the calculation of the employee’s “regular rate” for overtime purposes.
In other cases, however, a bonus may have been promised in a collective bargaining agreement or similar contract. Or the bonus may be calculated in a specific manner, such as a bonus of 50 cents for each hour worked during the year. Bonuses owed by agreement, as well as bonuses based on hours worked, production or efficiency, are included when calculating an employee’s “regular rate.”
To avoid going back and paying a premium for overtime hours, most employers prefer to make sure that Christmas bonuses are essentially a gift. A Christmas bonus can still be a gift even if it is paid with regularity each year and is expected by the employees. The bonus only loses gift status if it is owed by contract or calculated based on hours worked, production or efficiency.
Here is the specific regulation from the U.S. Department of Labor:
29 CFR § 778.212. Gifts, Christmas and special occasion bonuses.
(a) Statutory provision. Section 7(e)(1) of the Act provides that the term “regular rate” shall not be deemed to include “sums paid as gifts; payments in the nature of gifts made at Christmas 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 * * *”. Such sums may not, however, be credited toward overtime compensation due under the Act.
(b) Gift or similar payment. To qualify for exclusion under section 7(e)(1) the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment is geared to wages and hours during the bonus period and is no longer to be considered as in the nature of a gift. If the payment is so substantial that it can be assumed that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift. Obviously, if the bonus is paid pursuant to contract (so that the employee has a legal right to the payment and could bring suit to enforce it), it is not in the nature of a gift.
(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate under section 7(e)(1) even though it is paid with regularity so that the employees are led to expect it and even though the amounts paid to different employees or groups of employees vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency. A Christmas bonus paid (not pursuant to contract) in the amount of two weeks' salary to all employees and an equal additional amount for each 5 years of service with the firm, for example, would be excludable from the regular rate under this category.
Best wishes to all for a happy holiday season.