The holidays are a great time to show gratitude toward employees. They will value gifts from employers at this time as this can boost morale at the office and create a positive work environment. A way to show appreciation that is not monetary in nature may be to grant days off during the holidays so employees can spend more time with their families. However, if the office budget allows, a holiday gift in the form of a cash bonus may be the most valued, as it may ease employees’ financial stress from holiday shopping and travel.
When choosing to give a monetary bonus, employers should be cognizant of tax implications and federal labor laws to avoid tax liability, labor law violations, and anti-discrimination lawsuits.
Most employer gifts have tax implications and need to be reported. However, in limited circumstances, a gift may qualify as a de minimis fringe benefit. To qualify as such, it must be one for which, considering its value and frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.
The Internal Revenue Service’s (IRS) definition does not provide any dollar limits for the de minimis gifts exception. A qualifying gift does not require reporting. Even when the gift is of limited dollar value, it should be given infrequently, if it is given on a regular basis, then it will not qualify as a de minimis benefit and will have to be reported. It is prudent to consult with a qualified lawyer to determine whether the bonus qualifies as a de minimis gift.
According to the Federal Labor Standards Act (FLSA), nonexempt employees are entitled to overtime pay when they work over 40 hours in a workweek. The overtime rate is based on the regular rate of pay. The regular rate of pay is determined by dividing the total pay in the workweek by the total number of hours an employee has worked. When calculating the overtime rate, it is important to consider whether the bonus is also included in determining the rate as certain bonuses should be used to calculate the rate of pay. Failure to do so will expose employers to labor law disputes and violations.
Bonuses that are discretionary and classified as gifts are not used to calculate the rate of pay to determine an employee’s overtime rate. Sums paid as gifts and payments in the nature of gifts made at Christmas time or other special occasions are excluded from determining the rate of pay. Therefore, to qualify as a gift, it must not be related to the hours worked. These payments must be discretionary, not part of any employment contract or agreement, and the employee must not expect such payments regularly. A one-time holiday payment that is based on an employee’s two-week salary is considered a discretionary bonus if it was not already part of the employee’s contract, according to the Department of Labor’s regulations.
For legal advice on distributing holiday bonuses to your employees, consult the lawyers at MacMain Leinhauser. For an initial consultation, contact us online or call us at 484-318-7106. Located in West Chester, Pennsylvania, we serve clients throughout Philadelphia and Chester County.