Are Gifts, Bonuses Excluded from Compensation for Hours Worked? It Depends.

By Erika Paulus posted 12-05-2024 04:00 PM

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During the holiday season, many employers give gifts, such as $25 gift cards or bonuses, to employees. Whether such gifts are considered compensation for hours worked for nonexempt employees depends on the circumstances.

The Fair Labor Standards Act (FLSA) requires that employers pay nonexempt employees at least the federal minimum wage ($7.25 per hour) for all hours worked and overtime for hours worked over 40 in a workweek. To determine the amount of overtime due, the employer needs to determine the nonexempt employee’s regular rate of pay, which is calculated by dividing the total earnings for the workweek by the hours worked in the workweek. So, the question for employers is, for nonexempt employees, does the holiday gift or bonus need to be included as part of the total earnings for the workweek when determining the regular rate?

Holiday gifts may be excluded from the regular rate (i.e., not considered earnings for the workweek) if the gift is not dependent on the hours worked, production, or efficiency, according to Department of Labor (DOL) Fact Sheet 56A.

Some bonuses can be considered gifts. If an employer gives a holiday bonus as a reward for service or tenure, and the bonus is not awarded pursuant to a collective bargaining agreement (CBA), city ordinance, or policy, the bonus can be considered a gift and excluded from the regular rate, according to DOL Fact Sheet 56C.

Also, according to DOL Fact Sheet 56C:

Sign-on bonuses that do not have clawback provisions and are not paid pursuant to a CBA, city ordinance, or policy can also be considered gifts and excluded from the regular rate as long as the payments are not compensation for hours worked or tied to the amount or quality of work performed.

If a gift is of such a large amount that the employee considers it part of their wages, then it is not a gift and must be included in calculating the regular rate.

Fact Sheet 56C further explains that a holiday bonus can be excluded from the regular rate if it is discretionary as set forth under the FLSA, which requires the following:

“The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;

“The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and

“The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.”

Employers should check with their tax professional regarding how taxes should be handled for holiday gifts or bonuses. Consulting and Enterprise members can reach out to Employers Council with questions.

Erika Paulus is an attorney for Employers Council.

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