PERFORMANCE BONUSES AND AVOIDING LITIGATION

 

Performance bonuses are increasingly becoming a large part of compensation to employees at both large and small companies. Often, however, bonuses programs present certain legal risks.  For example, in instances involving non-exempt employees and non-discretionary bonuses, the Fair Labor Standards Act (FLSA) requires that you include any “extra” pay in the base salary of the employee when calculating overtime. Since many bonuses cover performance over a month, a quarter, or a year, under the FLSA the bonus is apportioned back over the workweeks during which it was earned.  For each workweek that an employee worked overtime during that period, the employee must receive additional compensation equal to one-half of the hourly rate of pay allocable to the bonus for that week, multiplied by the number of overtime hours worked. This must be paid as soon after the regular pay period as practicable, and never later than the next payday after the computation can be made.  Given this mandate, and the fact that bonuses are normally awarded after the regular pay period, it is easy to see how compliance can be challenging. 

 

An employer who fails to pay overtime faces serious consequences under the FLSA.  In such a case, the employer is liable for unpaid wages, plus an additional equal amount as liquidated damages, plus attorneys fees and court costs. An employee may recover back wages for two years, unless the employer's actions are proven to be willful. If the employer’s actions are proven to be willful then back wages for three years can be recovered. For a violation to be willful, the employer must either have known or shown reckless disregard for whether its conduct was prohibited by the FLSA. As further evidence of the protections provided to employees, class action lawsuits on behalf of all similarly situated employees also are allowed under the FLSA. 

Moreover, several state employment laws provide greater protection to  employees than the FLSA.  For example, under Maryland’s Wage Payment and Collection Law (MWPCL), employees can claim treble damages,  reasonable counsel fees, and other costs, if a court finds that an employer withheld the accrued “bonus” wages of an employee and it was not as a result of a bona fide dispute.   

While bonus plans are a great employee incentive, these are just a few examples of the inherent legal risks if they are not properly administered to ensure legal compliance.

 

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If your bonus program does not comply with the FLSA or the MWPCL, Jackson & Campbell’s Employment Law Practice Group can help you with remedial steps that can be taken to reduce the risk of liability.  Jackson & Campbell can also advise you on best practices with regard to bonus compensation to protect your company from potential liability in the future and provide counsel on other related matters.

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The contents of this Employment Law Alert are intended for general informational purposes only and should not be considered legal advice. Moreover, the mailing of this Employment Law Alert is not intended to create nor does it constitute an attorney-client relationship.

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