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Is your employer withholding your promised bonus? Understanding the difference between discretionary and non-discretionary bonuses could be worth thousands of dollars in your pocket. Here's what you need to know about your rights.

Quick Summary

Non-discretionary bonuses, tied to clear goals like sales targets or attendance, are legally required to be included in your overtime pay calculations.
Discover how non-discretionary bonuses provide reliable income and incentivize performance while reducing turnover.
Learn how to identify if your "discretionary" bonus is actually non-discretionary and what that means for your paycheck.

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

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

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

Unpacking Bonus Types: What You Need to Know

Bonuses can play a vital role in your overall earnings, but not all bonuses follow the same rules or serve the same purpose. Let’s explore the main types of bonuses, how they’re determined, and what they mean for your paycheck and legal rights.

What Is A Non-Discretionary Bonus?

A 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

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
A company offers new hires a $2,000 bonus, split into two payments: $1,000 after completing the first month and $1,000 after 90 days of employment.
Attendance Bonuses
Employees maintaining perfect attendance for the month receive a $100 bonus, promoting reliability and reducing absenteeism.
Quality of Work Bonuses
A manufacturing company rewards employees with an extra 5% of their pay for maintaining a 98% quality score over a quarter.
Accuracy Bonuses
A data entry firm offers a $50 bonus each month for employees achieving 99% or higher accuracy in their tasks, encouraging attention to detail.
Retention Bonuses
Employees who stay with the company for five years receive a $1,500 loyalty bonus, recognizing their long-term commitment.
Profitability Bonuses
If the company exceeds profit goals for the fiscal year, employees are rewarded with a 10% bonus tied to the company’s overall performance.
Referral Bonuses
Employees who successfully refer new hires earn a $1,000 bonus once the referred candidate completes their probationary period.
Production Bonuses
A sales team that surpasses their quarterly target by 20% earns a $500 group bonus, with additional rewards for individual performance.

Real-World Examples

In Smith v. ABC Corp (2022), the court ruled that an advertised sales bonus program could not be withdrawn mid-quarter after employees had already begun working toward the goals. The company was ordered to pay $50,000 in back pay to affected employees.
Carolyn, a non-exempt worker earning $20/hour, received a $100 non-discretionary bonus for perfect attendance during a week she worked 50 hours. Her adjusted hourly rate became $22/hour for that week, increasing her overtime rate from $30/hour to $33/hour.

What Is A Discretionary Bonus?

A discretionary bonus is a type of bonus awarded at the employer's sole discretion, without being tied to specific criteria or predetermined conditions.

Unlike non-discretionary bonuses, these bonuses are not guaranteed and are typically given as a reward for exceptional performance, loyalty, or goodwill.

Discretionary bonuses are not based on measurable goals or benchmarks and may vary in amount and frequency. Employers often use these bonuses to show appreciation or to boost employee morale during specific events or seasons.

They differ from non-discretionary bonuses, which are predictable and tied to objective performance metrics, by being flexible and unexpected.

Examples Of Discretionary Bonuses

To better understand bonuses that are awarded at an employer's discretion, here are examples of discretionary bonuses commonly used to reward employees:

Holiday Bonuses
Provided as a token of appreciation during the holiday season to recognize employees’ dedication and hard work throughout the year.
Spot Bonuses
Granted on the spot to acknowledge exceptional effort or outstanding performance on a specific task or project.
Performance Recognition Bonuses
Reward employees for surpassing expectations on key projects or initiatives with exceptional contributions.
End-of-Year Bonuses
Distributed at the close of the fiscal year to celebrate company success and employees’ contributions, often linked to overall performance.
Team Achievement Bonuses
Given to recognize group accomplishments, promoting collaboration and teamwork among employees.

By understanding the distinction between discretionary and non-discretionary bonuses, employees can better navigate their expectations and rights regarding additional compensation.

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

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?

Yes, 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

Resolve Non-Discretionary Bonus Disputes Quickly

Non-discretionary bonuses are a guaranteed part of an employee's compensation package, tied to specific criteria like performance or attendance.

Here are the most important aspects to understand, along with actionable steps for handling disputes.

1. Guaranteed Payments Based on Set Criteria

Non-discretionary bonuses are earned when employees meet clearly defined metrics, such as sales targets, attendance, or production goals. These payments are not subject to employer discretion once the conditions are established.

2. State-Specific Regulations

Laws governing bonuses vary by state, so it’s important to understand local requirements.

Examples:

North Dakota: Bonuses must be paid if employees meet the criteria outlined in contracts.
Colorado: Forfeiture clauses requiring employment at payout time are unenforceable.
Actionable Advice: Employers should review state-specific laws regularly to ensure compliance.

3. Proper Documentation is Crucial

Both employers and employees should keep detailed records of bonus agreements to avoid disputes.

Key Documents: Employment contracts, bonus policies, emails discussing eligibility, and performance metrics.
Why It’s Important: Proper documentation can resolve disputes quickly and prevent costly legal battles.

Handling Disputes Over Bonuses

If your employer denies a non-discretionary bonus, follow these steps:

Review the Agreement: Carefully read the bonus terms in your employment contract or policy.
Gather Evidence: Collect documentation proving you met the eligibility criteria, such as attendance records or sales reports.
Communicate With HR: Schedule a meeting with HR or your manager to discuss the issue and present your case.
Seek Legal Advice: If the issue isn’t resolved, consult an employment attorney to explore your options.

Clear communication and adherence to agreements can help prevent misunderstandings and ensure fair compensation for all parties.

Why Do Discretionary And Non-Discretionary Bonus Pay Matter?

Discretionary 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.Related Articles

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FAQs

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.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.

Can My Employer Change a Non-Discretionary Bonus Program Mid-Year?

Employers can change a non-discretionary bonus program mid-year, but they must provide clear communication and cannot retroactively deny bonuses already earned. Changes must comply with state and federal labor laws.

What Documentation Should I Keep About My Bonus Program?

Keep written records such as your employment agreement, bonus plan details, emails, or any official communication outlining bonus criteria. These documents can be crucial if disputes arise.

How Do Non-Discretionary Bonuses Affect My Final Paycheck if I Quit?

Non-discretionary bonuses earned before resignation must typically be included in your final paycheck. Check your state laws and company policy to ensure compliance.

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 atSchmidt & Clark, LLP have a proven track record of successfully handling bonus disputes and holding employers accountable for their actions.Contact Schmidt & Clark, LLP 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.

References:

https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/FairLaborStandAct.pdf
https://www.dol.gov/agencies/whd/fact-sheets/56c-bonuses#:~:text=under%20the%20FLSA.-,Nondiscretionary%20Bonuses,statutory%20provision%20(see%20below).
https://www.flsa.com/coverage.html

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