No, the bonus probably does not have to be included under these circumstances, but specific facts are crucial. Regular-rate calculations may exclude payments that are in the nature of a gift as a reward for service at Christmas or on other special occasions. A Christmas or year-end bonus may be based on a regular salary or pay for a standard workweek but cannot be measured by hours worked, production or efficiency. Furthermore, it may not be so substantial that the employees consider it a part of wages and it cannot be paid pursuant to a contractual obligation.

Holiday payments of $20, $50 or $100 are not substantial. Even two weeks’ pay is not so substantial as to disqualify the bonus from exclusion. Likewise, four weeks’ pay for more senior employees is permissible, the Wage and Hour Division says. Payments may vary in size based on salary, length of service or employee grouping, so long as the amounts are not based directly on hours, production or efficiency.

Is there a contract to pay? The fact that bonuses have been paid regularly for a long time, even pursuant to a set formula, does not convert them into regular compensation. This is true, even if employees have come to expect the payment. However, employees’ expectations cannot rise to the level of a contract obligation, either express or implied. Then, the payment is no longer in the nature of a gift.

For example, incorporating the payments into individual agreements or union contracts could require their inclusion in overtime-pay computations. Similarly, oral promises to employees or job applicants could be construed, at least in some circumstances, as creating an implied obligation to pay the bonus in return for accepting or continuing employment. Bonus amounts should not be included in annual salary figures.

The Wage and Hour Division advised one employer that a customary annual bonus probably had to be included. Most significantly, the bonus amount was based, in part, on job performance. However, the Division also suggested that a longstanding practice of payment, coupled with monthly allocations to the bonus pool and promises to new hires, likely created an implied understanding that workers would be paid (Wage & Hour Opinion Letter, November 5, 1999, 99-02 CCH WH ¶32,994).

Employees and applicants can be told that bonuses have been paid in the past—even that management hopes to be able to continue the practice. However, this dangerously invites managers and human resources personnel to overstate the certainty of payment. Management should caution that the payments are discretionary and subject to annual approval.

If a holiday or year-end bonus does not qualify for exclusion from overtime pay, then management must go back and recalculate any overtime compensation paid in earlier weeks.

Source: CCH Wage Hour Compliance Guide.