What Hourly Workers Need to Know About That Incentive Bonus

Incentive bonus payments are designed to attract and retain the best workers, but did you know that companies must meet state and federal labor law standards when it comes to these bonuses? Read on to learn more.

What Is an Incentive Bonus?

“Incentive bonuses” fall under a number of compensation structures, according to Investopedia, including sales-based commissions, annual incentive plans, discretionary bonuses, spot awards, profit sharing plans, gain sharing plans, team incentives, retention bonuses, and project bonuses. They may be formal or informal, says Investopedia.

Incentive bonuses are becoming more popular among employers as well. According to a 2017 report by PayScale, almost 75% of organizations included in the research offered some sort of variable pay to employees. Incentive bonuses allow companies to reward high performing employees while keeping their fixed costs low, says PayScale, but employers must meet certain standards under state and federal law.

According to the U.S. Department of Labor (DOL), non-exempt employees, including most hourly workers, must be paid the federal minimum wage. This excludes some types of incentive bonuses, explains the DOL, including discretionary bonuses, certain gifts, and sign-on bonuses, provided they meet certain criteria. However, non-discretionary bonuses must be included in an employee’s regular rate of pay.

California’s hourly workers are also entitled to protections under the state’s Fair Labor Standards Act, including a more generous minimum wage and overtime pay requirements. Indeed, California has its own standards for including incentive bonuses in an employee’s regular rate of pay.

Are Incentive Bonuses Taxable?

While incentive bonuses are usually a welcome item on your paycheck, they are subject to state and federal taxes. In fact, according to TurboTax, bonuses are taxed at a higher rate federally than other income, with incentive bonuses being taxed at a flat 22% as supplemental income on the federal level, in addition to Social Security tax and Medicare tax. In addition, California assesses a 10.23% tax on certain incentive bonuses, according to UCLA’s Corporate Financial Services.

How Do Incentive Bonuses Impact Overtime Pay?

Under federal labor law, whether or not an incentive bonus affects an employee’s regular rate of pay will have an impact on overtime pay. Indeed, under the Fair Labor Standards Act, hourly employees who work over 40 hours in a week are entitled to 1.5 times their regular rate of pay. Certain bonuses can increase the regular rate of pay and should result in a larger paycheck.

Overtime for hourly employees in California is subject to even stricter laws. According to the California Department of Industrial Relations, overtime applies to both hours worked over 40 in a workweek, as well as over eight hours a day. As on the federal level, overtime is calculated using the employee’s regular rate of pay and can include incentive bonuses, says the agency.

However, some companies in California may have been underpaying their hourly employees by failing to include incentive bonuses in their overtime pay. It may be difficult for employees to identify if their paycheck includes non-discretionary incentive bonuses in their regular rates of pay when it comes to overtime. In this way, employers may make employees feel as if they are receiving extra pay, but also failing to pay them all of the wages they are due under federal and state law.

If you are an hourly employee in California who has received an incentive bonus and you are concerned that it was not properly reflected in your paycheck, consider contacting an experienced labor law attorney for help.