An Approach To Thinking About Discretionary vs Non-Discretionary Pay In California

A common question that we are often asked as the holiday season approaches is how must employers treat holiday bonuses, and are such bonuses subject to overtime calculations.  The key questions to determine is whether or not the bonus is a non-discretionary versus discretionary bonus.

While California does not have a definite answer as to  what is or is not non-discretionary , YourvirtualHR has come up with a simple concept to consider: is the bonus payment considered “earned” or not, meaning did the employee have to somehow qualify in order to get the bonus. Applying this concept should help employers determine whether or not a bonus is discretionary, and thus subject to overtime calculations.

Here are some questions for employers to consider:

1. Do employees have to qualify for the bonus, i.e. earning/qualifying for the bonus is based on factors such as service years or performance. (If the answer is yes, then it is possible the bonus is non-discretionary;
2. Is there a written bonus formula that is provided to employees, which includes the specifics of how they will earn the bonus? If yes, consider some examples and additional questions below in determining whether or not a bonus is “earned”:
3. 1. A policy that states that every year in December and an employee will receive a $100 bonus and/or receive a bonus that is paid at a certain time, could be considered earned and non-discretionary;
4. 1. A policy that states “Because our employees are valuable part of the company, from time to time, the company may evaluate and possibly grant a discretionary bonus or provide other perks or events to employees, amounts, details, and timing of payments are determined and/or paid at the sole and absolute direction of the employer” can probably be considered discretionary because there are no qualifications as to how the bonus is earned;
5. 1. A company decides that in December 2018, in order to show appreciation for everyone’s hard work, and a bonus will be paid in the amount of “x” for all employees. This could be considered discretionary.  Then in December 2019, the company decides that another amount “x” will be paid around the same time, as the company had a profitable year.  In December 2020, the company does not do as well and so offers a company luncheon to thank everyone but no bonus.  This is probably a discretionary bonus.
6. 1. Do all employees receive the same bonus regardless of performance or length of service, position, etc., or do employees have to qualify for the bonus? For example, do employees have to pass a probationary period, not be written up, be in good standing, or perform according to a certain standard? If there are qualification requirements, then the bonus could be considered a non-discretionary bonus because the employee has to “earn/qualify” in order to receive the bonus;
7. 1. Is the amount of bonus significant. For example,  $100.00 versus one month at the employee’s regular pay.  If it is significant, it could be considered a non-discretionary bonus.  (However, this is a very gray area. We have not not encountered any issues with the amount of payment, but rather the consistency and fairness of the payment in question).

Before you create a discretionary bonus policy, at least consider these factors and always consult with your employment law attorney to make sure you are in compliance with California’s overtime laws as they apply to discretionary bonuses.

For any questions about implementing an polices and how YourVirtualHR, Inc. can help,  please give us a call at Toll Free 1-562-888-0126 or email sales@yourvirtualhr.com for more information.