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Legal Considerations For Employee Bonuses And Commissions

Bonuses and commissions are a standard part of employee compensation packages in many industries, and companies of all sizes take advantage of them to maintain workplace morale and attract new talent. However, the contract terms and employee handbook guidelines that establish any rates and requirements for earning bonuses and commissions must be crafted carefully to ensure not only compliance with state, local, and federal laws, but also a pay structure that will be sustainable for the business and effective at incentivizing peak performance from company personnel. The practical as well as legal considerations that may come into play in implementing employee bonuses and commissions can vary widely depending on the circumstances, so discussing your company’s plans with an experienced business law attorney may be a useful step as you weigh your options. Schedule a consultation with Schwab & Gasparini by calling any of our conveniently located New York offices. Reach us in Syracuse at (315) 422-1333, in Albany at (518) 591-4664, or in Hudson Valley and White Plains at (914) 304-4353.

Types of Legal Considerations Related to Employee Bonuses and Commissions

Attorneys who handle business law matters frequently receive questions about the bonuses and commissions that are part of the employee compensation structures in many companies. While the specifics do vary significantly from one organization to the next, many of these questions about the legal considerations pertaining to employee bonuses and commissions can be grouped into a couple of broad categories:

• Negotiation and fulfillment of contractual obligations
• Regulatory compliance

Because many of the potential compliance issues associated with employee bonuses and commissions arise in relation to the federal requirements for overtime pay calculations under the Fair Labor Standards Act (FLSA), and regulatory guidance from the United States Department of Labor (DOL) on making those calculations is based in part on considerations that may be set out in employee contracts or company handbooks, it is very common for concerns related to regulatory “wage and hour” compliance to arise in the context of negotiating compensation packages for new employee contracts. Depending on the circumstances, however, the structure for employee bonuses and commissions can be subject to an additional set of concerns related to workplace discrimination and human resources (HR) policies.

Why Employers Should Consider FLSA Overtime Pay Calculations in Negotiating Bonuses and Commissions as Employee Compensation

The past few years have seen a complicated labor market, with many businesses short-staffed and others laying off longtime employees. Economic uncertainty has given prospective new hires a strong incentive to negotiate competitive compensation packages in order to improve their own resilience in the face of potential upheavals, while awareness of the same factors has led many employers to be cautious about committing to salaries that could be difficult to sustain in the event of a decrease in company revenue. While these potentially competing interests can sometimes lead to tensions in the negotiating room, the reality – as many HR professionals can attest – is that, most of the time, both parties are simply trying to think ahead and prepare for the unexpected by putting themselves (and their families or firms) in position to weather future storms or capitalize on emerging opportunities, as and when these arise.

Negotiating performance-based or otherwise contingent bonuses and commissions as part of the total compensation package specified in an employee’s contract has become an increasingly popular tool for ensuring that businesses are able to attract high-quality talent, while minimizing a company’s financial risks. Prospective employees often appreciate the idea of a clear structure for securing compensation beyond their “base” pay, and in some fields the leading talents are actively drawn to compensation structures that explicitly reward superlative performances. However, there are a few factors that company leadership and HR teams should keep in mind as they consider stipulating bonuses or commissions in a new contract offer.

Bonuses as Employee Compensation Under the Fair Labor Standards Act

The (DOL) defines a bonus as a payment to an employee over and above his or her “regular earnings.” According to the DOL, all total compensation paid to an employee is generally included in the employee’s regular “rate of pay” for the purposes of overtime pay calculations, with the exception of certain payments that are specifically excluded under the FLSA. Some types of bonuses are among the exceptions identified in the exclusion list, and some employees may be classified as “exempt” from overtime pay calculations under 29 CFR Part 541 – however, it is important to note that, for non-exempt employees, only those bonuses specifically identified on the FLSA’s list of exempt payments may be excluded from overtime pay calculations.

Impact of Non-Excluded Employee Bonuses on Overtime Pay Calculations

Bonuses that are not found on the itemized FLSA list must be taken into consideration when computing an individual employee’s regular rate of pay to determine the minimum wages due to the employee as overtime pay compensation. Because an employee’s overtime pay must be at least one and a half times their “regular” rate of pay, whether any bonuses paid to the employee as compensation are, or are not, excluded from rate of pay calculations can sometimes make a substantial difference in the amounts due to employees covered under the FLSA when their work-hours within a given work-week exceed the 40-hour federal threshold.

Bonuses paid to employees in positions classified as “exempt” from overtime pay calculations under the Fair Labor Standards Act do not incur the same set of considerations; however, misclassifying employees as exempt from FLSA overtime pay calculations can lead to significant compliance issues. If you have questions about whether an employee position should be considered exempt under one of the categories described in DOL Fact Sheet #17A, you may wish to consider speaking with an experienced New York employment and regulatory compliance lawyer to obtain legal guidance.

General Criteria for Bonus Exclusions Under the FLSA

Bonuses that the DOL considers “discretionary” may, however, be excluded from the calculations made in computing an employee’s overtime pay. The DOL considers a bonus discretionary if both of the following conditions are met:

• The bonus is not paid pursuant to a pre-existing agreement, pledge, or contractual obligation under which an employee might expect this type of payment on a regular basis
• The amount of the payment, as well as the decision to make the payment, are entirely within the employer’s discretion (not part of the employer’s fulfillment of an existing arrangement), and both the decision and the payment are made at or near the end of the pay period

Notably, although both workers and employers frequently refer to “holiday bonuses” and the like, the DOL categorizes the distributions often paid to employees on holidays, birthdays, and other “special” occasions as belonging to a separate type of exclusion, “Gifts and Payments in the Nature of Gifts.” Further complicating the regulatory compliance obligations of companies’ HR teams, non-discretionary bonuses (which would generally not be excluded from overtime pay calculations for non-exempt employees) may sometimes be computed as up to 10% of an employee’s total annual salary for the purposes of determining whether the employee’s compensation meets the minimum salary portion of the federal requirements for determining FSLA exempt status, according to guidance from the DOL’s Wage and Hour Division (WHD). An experienced New York business law and employer defense attorney with Schwab & Gasparini may be able to help you determine how these overlapping considerations may affect your company’s interests in evaluating the terms of employee contracts. 

Legal Considerations for Employee Commissions

Workers in some fields receive their pay primarily or exclusively in the form of commissions as a matter of course. This scenario is very common in sales positions, but may apply in some other jobs in various sectors of the service industry as well. The two main potential problem areas for businesses to watch if they include commissions as part of employees’ regular compensation are:

• Making sure the compensation as paid meets federal wage and hour requirements
• Making sure that the commission payments are consistent with the terms of each employee’s individual contract and in line with state and federal expectations concerning equitable treatment of employees

“Equitable treatment of employees” can vary somewhat depending on position, performance, and job requirements, but broadly speaking is more likely to be a consideration in the application of company-wide policies than in the fulfillment of individually-negotiated contracts. While the “optics” of negotiating very different contract terms for employees with very similar positions and qualifications can be problematic, troubling legal implications more often arise when the company handbook sets specifications for commission earnings. Generally speaking, businesses that establish criteria for earning commissions will need to apply those criteria evenly across all employees whose positions qualify for commissions, and ensure that employees in similar roles are similarly positioned with respect to commission potential. Failure to establish proper procedures for ensuring consistency across these areas can result in accusations of workplace discrimination, in addition to creating more generalized problems with employee morale.

Speak With a New York Business Law Attorney

The factors to be considered in evaluating employee bonuses and commissions for regulatory compliance and practical feasibility are often complex. Discussing your company’s priorities and plans for employee compensation structures with an experienced business law attorney in your area can often be helpful in developing a strategy to effectively address your organization’s core concerns. Reach out to a member of the Schwab & Gasparini team by calling any of our offices, conveniently located throughout New York State. Dial (914) 304-4353 to connect with our offices in White Plains and Hudson Valley, (315) 422-1333 for our Syracuse location, or (518) 591-4664 to arrange a meeting with an attorney in the Albany area.

Sun Jan 5 2025, 12:00am