The end of the year poses unique challenges for employers seeking to reward employees and at the same time stay compliant with hyper-technical legal mandates. No aspect of employment relationships is simple or intuitive in California and that is especially true for gift giving in 2024. Most risky practices can be avoided. With that in mind, this is a checklist of common problems and ways to avoid them.
Common Issues and How to Avoid Them
1. Have annual discretionary bonuses become part of a compensation plan?
Non-discretionary bonuses must be considered when calculating the regular rate of pay for overtime purposes. These would include bonuses for reaching a certain production goal, or for perfect attendance or for securing new customers. But what about discretionary bonuses, bonuses that are not guaranteed, but paid out as a gesture of good will in the holiday spirit? While such bonuses do not generally affect the overtime rate, aggressive plaintiffs have argued that when they are paid each year without fail, they do in effect become a promised benefit and therefore must be taken into account when paying overtime.
The argument is that although called a “discretionary bonus,” the payments have been made so regularly that there is an implied promise causing employees to expect them. So should employers hold off on such bonuses? Not necessarily, but to avoid overtime issues, anticipated annual bonuses should either be considered when calculating overtime rates or such bonuses should be paid as a percentage of total pay (discussed below).
2. Will gifts such as a paid day off affect the regular rate of pay for overtime purposes?
Some employers provide paid time off as a bonus or reward. In general, personal holiday pay is not considered when calculating the regular rate of pay for overtime purposes as it is not considered pay for time worked.
3. What about gifts such as a holiday meal?
In general, providing a gift at a holiday or other special occasion, so long as the amount or value is not measured by or dependent upon hours worked, production or efficiency, would not be considered when determining the regular rate of pay for overtime purposes.
4. When an employer reimburses an employee for a business expense, such as the use of a cell phone, can the employer “over-pay” for the expense as a gesture of good will?
In general, paying an employee significantly more than the expense at issue will be considered payment for time worked and should be considered when calculating overtime rates.
5. If an employer’s annual “gift” is so regular that employees have come to depend upon it as part of their annual income, how can an employer avoid the complication of determining whether the gift affects the calculation of overtime rates?
One generally accepted method is to calculate the amount of the “gift” as a percentage of total pay – straight and overtime pay alike. Percentage of pay bonuses, such as one percent of all compensation, are excluded from the regular rate because the overtime calculations are baked in already.
6. What about giving a substantial gift, such as an airline ticket or stay at a resort?
While such a gift, if truly discretionary and not a guarantee, would not affect overtime rates, it could impact the employee’s taxable income. Those consequences should be considered in advance so as to avoid unpleasant surprises at tax time.
7. What about payments to help an employee reduce student debt?
Payments for fringe benefits, such as a plan to assist with student debt, should not necessarily affect the regular rate for overtime purposes. However, as with any fringe benefit, payment should be made to a third party to avoid any claim that the payments are essentially a bonus to be used without restriction. And if adopting a plan to help pay off student load debt, consider whether such a plan is fair to those employees who did not incur any debt. Favoritism of any kind can lead to claims of illegal discrimination. Consider whether other fringe benefits can be offered to even out the scales.
In summary, generosity can boost employee relations, but it may come with a price. Plan ahead when considering employee gifts.
