There are two types of bonuses that employees may receive, discretionary and non-discretionary. Discretionary vs. non-discretionary bonuses have several differences.
Bonus Payments: What is the difference?
A discretionary bonus is exactly what it says, discretionary. This bonus is made solely on the discretion of the employer. The requirements and amounts for the bonus are not given to the employee ahead of time. Discretionary bonuses are usually paid for services performed. For the bonus to be thought of as discretionary, there cannot be any contract or agreement made ahead of time for the bonus to be paid. A majority of bonuses fall under discretionary bonuses.
A non-discretionary bonus is the complete opposite of a discretionary bonus. A non-discretionary bonus is paid because of a contract or agreement that has been made between the employer and employee ahead of time. The agreement is usually associated with production, quality, attendance or another form of performance. A non-discretionary bonus is a bonus that the employee is expected to be paid and it is usually given at the same time, either monthly, quarterly or annually. Because these bonuses are agreed upon ahead of time, they must be included in the regular rate of pay and the calculation of overtime.
Insight for Employers
Employers pay employees various types of bonuses. The regulations do provide some guidance, however, if bonus issues are ignored it could lead to serious penalties down the road. Even if you are familiar with these rules, if your business provides any type of bonus, it may be a good idea to contact your payroll provider. They can help you determine the right course of action.
Read our other articles to help you stay in compliance with your payroll process.