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5 Keynote Points For Non-Discretionary Bonus
(Definition & Examples)

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C.L. Mike Schmidt Published by C.L. Mike Schmidt

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Bonus payments are a crucial component of an employee compensation package. However, not all bonuses are created equal, and some may be subject to discretion or conditions that can make them unreliable or unpredictable. This is where non-discretionary bonuses come in.

As an attorney will almost a decade of experience, I have worked on several cases related to non-discretionary bonuses and the legalities that surround them. In this article, I will provide all the needed information about your rights to non-discretionary bonuses.

Quick Summary

  • A non-discretionary bonus is predetermined and typically based on objective criteria, such as sales targets or attendance records.
  • Non-discretionary bonuses are significant because they provide employees with a reliable and unchanging component of their pay, determined by measurable standards, and intended to incentivize top performance, recognize achievements, and lower employee attrition.
  • Non-discretionary bonuses can impact an employee's regular pay rate and must be included in an employee's standard pay rate when calculating overtime pay.

What Is A Non-Discretionary Bonus?

An employee receiving a non-discretionary bonusA non-discretionary bonus is a type of bonus that is guaranteed and predetermined and not subject to any subjective evaluation or conditions.

It is typically based on objective criteria such as sales targets, production levels, or attendance records. It is usually paid out on a regular schedule, such as weekly, monthly, or quarterly.

Non-discretionary bonuses are a type of bonus that forms a part of an employee's compensation package. They are given to employees to motivate them, acknowledge their top performance, and reduce employee turnover.

They differ from discretionary bonuses, which are determined and can vary from year to year by being predictable and fixed.

Examples Of Non-Discretionary Bonuses

A top view of scattered dollar bills

To better understand which bonuses given by employers are predetermined, here's a list of commonly awarded non-discretionary bonuses that aim to incentivize better performance at work:

  • Hiring bonuses
  • Attendance bonuses
  • Bonuses for quality of work
  • Bonuses for accuracy of work
  • Longevity pay for retention bonuses
  • Profitability bonuses
  • Referral bonuses
  • Individual or group production bonuses

5 Key Information to Keep in Mind Regarding Non-Discretionary Bonuses

An employee counting his non-discretionary bonus pay

Employees who qualify for a non-discretionary bonus must keep in mind at least these 5 points:

  1. Workers can expect non-discretionary bonuses as a form of compensation.
  2. They change the worker's typical pay rate.
  3. Non-exempt workers have the authority to modify the overtime pay of an employee.
  4. Whether or not the employer refers to it as a discretionary bonus is irrelevant.
  5. They are used as incentives to encourage positive workplace conduct.

What Is The Difference Between A Non-Discretionary Bonus and A Discretionary Bonus?

A top view of a clock on top of dollar bills

The difference between a non-discretionary bonus and a discretionary bonus is that a non-discretionary bonus is predetermined and fixed.

In contrast, a discretionary bonus can vary from year to year.

Here are some of the differences between the two bonuses:

  • Non-discretionary bonuses are based on objective criteria, while discretionary bonuses may be given at an employer's discretion.
  • Non-discretionary bonuses are usually paid out regularly, while discretionary bonuses may be one-time payments.
  • Non-discretionary bonuses form part of an employee's compensation package, while discretionary bonuses may not.
  • Non-discretionary bonuses are taxed differently than discretionary bonuses.
  • Non-discretionary bonuses may reward employees' top performance, while discretionary bonuses are used to thank employees for good work or loyalty.

Note that just because your workplace has a culture of giving bonuses, a discretionary bonus isn't guaranteed to be paid by law. According to the Fair Labor Standards Act (FLSA), many bonuses are not discretionary [1].

According to the Fair Labor Standards Act (FLSA), if you give non-discretionary bonuses to employees, you must include them in their regular pay rate when calculating overtime pay [2]. 

"One of the biggest differences between discretionary and non-discretionary bonuses is that discretionary bonuses are not something you can expect to receive. Instead, employers award these bonuses at their discretion when they believe employees have earned them."
- Lee Bantle, Member of The Bar of The U.S. District Court

Can Non-Discretionary Bonuses Impact An Employee's Regular Rate Of Pay?

A smiling employee holding his non-discretionary bonusYes, non-discretionary bonuses can impact an employee's regular rate of pay. Under the Fair Labor Standards Act (FLSA) in the United States, non-discretionary bonuses must be included in an employee's regular pay rate when calculating overtime pay. 

This means that the bonus amount is added to the employee's total compensation for the workweek, and the overtime hours are calculated based on this higher amount.

The employee may receive additional overtime pay if their overtime hourly rate increases. Discretionary bonuses, however, cannot be included in the regular rate of pay calculation for overtime since they are not assured and depend solely on the employer's discretion.

Certain employees are exempt from state and federal wage and hour laws. However, the employees who are not exempt from these laws, also known as "non-exempt" employees, are entitled to receive overtime pay if they work more than a specific number of hours. 

Per the FLSA guidelines, non-exempt employees should receive time-and-a-half pay for every hour they work beyond 40 hours in a workweek [3].

Related Article: New Labor Laws in 2023

Why Do Discretionary And Non-discretionary Bonus Pay Matter?

A happy woman who received her non-discretionary bonus payDiscretionary and non-discretionary bonus pay matter because they can significantly impact an employee's wages or earnings and their overtime pay.

Non-discretionary bonuses must be in the regular rate of pay calculation and thus can affect how much money an employee takes home each paycheck.

Discretionary bonuses provide more wiggle room for employers to reward good performance, loyalty, or hard work with a one-time payment.

This can be an effective way to incentivize employees and cultivate a positive working environment.

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How Can You Calculate A Non-Discretionary Bonus?

You can calculate a non-discretionary bonus based on a predetermined formula or criteria. This may include individual or team performance, sales figures, or other measurable metrics.

What Is A Discretionary Bonus Example?

A discretionary bonus example is the end-of-year bonuses, holiday bonuses, or bonuses for exceptional performance.

Why Can I Get A Discretionary Bonus?

You can get a discretionary bonus to reward exceptional performance, encourage loyalty, or recognize outstanding contributions to the company.

Discretionary bonuses may also boost morale or show appreciation for hard work during difficult times.

Are You Being Denied A Bonus?

It can be frustrating and stressful if you believe you have been denied a bonus you rightfully earned. The experienced attorneys at Schmidt & Clark, LLP have a proven track record of successfully handling bonus disputes and holding employers accountable for their actions.

Contact Schmidt & Clark for a free consultation to discuss your case and provide you with the guidance and support you need.

We understand how important bonuses can be to your financial security and overall well-being, and we are committed to fighting for your rights.