For readers in the U.S., tomorrow is Thanksgiving and the start of a long holiday weekend for many of us. As we head into the holiday break, it is a good time to address how employers should handle holiday gifts to employees. At one of my former companies, we had a tradition of buying (or donating, on the employee’s behalf) a turkey every Thanksgiving. At other companies, I’ve gotten Omaha steaks, holiday hams, or free meals. Well-fed employees make good business sense because they make a productive and engaged team, say numerous experts and business leaders who have written many different articles over the years.
Unfortunately for employers, the IRS and some enterprising plaintiffs’ attorneys have tried to turn those free meals, holiday hams, and Thanksgiving turkeys into “remuneration” that employers must include in calculations of the regular rate. We talked about this topic before in the context of bonuses and per diems, but the concept of “remuneration” goes beyond cash compensation and extends to non-cash compensation like food, room and board, and gifts. Don’t try to return your Butterball order just yet, though. You need to understand the implications under the Fair Labor Standards Act (FLSA) and state law when it comes to non-cash gifts like these. Handled correctly, not every turkey, dozen donuts, or coupon for a holiday ham will lead to wage and hour liability.
Holiday and Other Special Gifts under the FLSA and State Laws
Under the FLSA, bonus payments are divided into discretionary and nondiscretionary categories. Employers must include nondiscretionary bonuses in an employee’s regular rate of pay for the purposes of calculating overtime, but need not do so for “discretionary” bonuses. Few bonuses are discretionary under the FLSA, allowing exclusion from the regular rate (see Sections 778.200 and 778.208 of the regulations). Under the FLSA regulations, bonuses are only discretionary if:
- Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer; and
- The bonuses are not paid under any prior contract, agreement, or promise causing the employee to expect such payments regularly.
State laws are similar. For instance, Florida statutes define wages as “all compensation paid by an employer or his or her agent for the performance of service by an employee, including the cash value of all compensation paid in any medium other than cash.”
Non-exempt employees can argue that their hourly wages do not reflect the value of holiday gifts or free meals. In other words, the argument is that the turkey or the free meal is “compensation paid” in a “medium other than cash” that employers must factor into the regular rate of pay. Said more directly, the value of a Thanksgiving turkey “bonus” increases the per-hour regular rate. To take a simple example, if the employee receives a $5 daily credit in the company cafeteria during December as a holiday bonus, those meals add up to an extra $25 per week in compensation paid in a “medium other than cash.” For an employee earning $9/hour and working 50 hours per week, that extra $25 would increase the straight-time rate to $9.50/hour and the overtime premium to $14.25/hour. That’s only $7.50 per week, but if you multiply that by roughly 50 workweeks each year, and again by the number of employees eating in the cafeteria, you could be eating a lawsuit along with stuffing and cranberry sauce this year.
Avoiding Holiday Surprises: the FLSA’s Gift, Christmas, and Special Occasion Bonus Rules
Many employers assume that if they give their employees a gift card to an online store, grocery store, or gas station around the holidays that there is a de minimis rule that means that these benefits are not taxed, or at least not reportable because they fall below the threshold required for reporting on a 1099. Setting aside whether this is accurate or not (it depends on the situation), this rule is a tax rule, not a wage and hour rule.
As I suggested earlier, don’t cancel your holiday gift plans just yet. Employers can carefully craft fringe benefit and gift policies like these to avoid liability for claims that those benefits should be included along with other payments when calculating the regular rate for non-exempt employees. The FLSA and its regulations, perhaps recognizing that the bonus provisions I cite above would provide a disincentive for employers to give bonuses, exclude certain gifts made at Christmas time or for other special occasions. Section 7(e)(1) of the FLSA provides that the term “regular rate” shall not be deemed to include “sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.” The onus is on the employer to prove that a payment meets this exemption.
For a Thanksgiving turkey, holiday ham, or Christmas bonus to be discretionary for FLSA purposes, the employer (1) must retain discretion both as to whether the payment is made and as to the amount of payment, and (2) the employee cannot have a contractual right to the bonus or to any particular amount nor can the bonus be otherwise promised to the employee. Setting aside regular free meals–a separate issue with a separate solution–the keys to keeping holiday gifts like turkeys and gift cards noncompensable are (1) considering the nature of the gift and (2) limiting the amount of the gift.
For example, if you promise in advance to pay employees a bonus, then the bonus is no longer discretionary. Even if you promise a specific bonus amount in advance, but reserve the right whether to pay it, the bonus is not discretionary under the FLSA. For obvious reasons, if the bonus is legally guaranteed (such as part of a collective bargaining agreement) or predicated on attendance, individual/group/department/company production, work quality or accuracy, or some future period of employment, then the bonus cannot be excluded under the gift provisions. It is simply a “promised bonus” that you must include in the regular rate of pay.
Similarly, the amount of the gift matters, too. If the gift or bonus is so substantial that it could be considered wages, it cannot be considered a gift. The DOL regulations use the specific example of a one-time Christmas bonus of two weeks’ salary for all employees plus an equal additional amount for each five years of service as being excludable under the FLSA regulations’ gift provisions, provided it was not measured by or directly dependent upon hours worked, production, or efficiency, or otherwise required by a contract.
Of course, a regular bonus practice can create expectations for employees if they get them every year. In another attempt to avoid discouraging bonuses like these, the FLSA’s gift regulations explain that employers can still exclude these gifts from the regular rate of pay even though they pay them with such regularity that employees expect it. The regulations explain that this holds true even if the employer pays different amounts to different employees, as long as the gifts are not measured by or directly dependent on hours worked, production, or efficiency or required by contract.
Upshot for Employers
While every situation—and potential solution—will depend on your specific circumstances, don’t let wage and hour fears keep you from handing out those turkeys and holiday gifts to your employers, whatever they might be. Avoid promising specific amounts or bonus calculation formulas to employees, and don’t tie the bonuses to attendance, hours worked, production, or efficiency. If you plan to make substantial gifts to employees, or if you have questions about whether your gifts meet the requirements above, consider whether you should treat the gifts as wages. Getting advice beforehand and following the FLSA’s guidance carefully should help you avoid wage and hour liability without putting a damper on your holiday traditions.
I hope that all of you in the U.S. have a joyful holiday and can spend it with those you love. Happy Thanksgiving and see you next week!