Seyfarth Synopsis: Employers offering bonuses to workers during the COVID-19 crisis must beware the famous saying that “wisdom comes to us when it can no longer do any good.” Some bonuses trigger special rules that employers must follow to avoid unexpected liabilities in the time of COVID.

Readers of this blog know that California creates peculiar challenges for companies that choose to provide their employees with certain benefits and incentives. A classic example is vacation pay. While employers need not provide paid vacations, employers that do so may face unexpected liability because of Cal-peculiar rules that treat unused vacation pay as a vested wage.

Like vacation pay, bonuses are optional, but quite common. Many employers find bonuses useful to motivate employees and reward special service. Bonuses may be particularly helpful in the time of COVID: essential businesses that remain open know that work can be especially stressful for employees.

Recognizing this reality, businesses may institute short-term bonuses for employees who answer the call of duty during these challenging times. A bonus might provide for an extra $X per week of service or an extra $Y per hour. These amounts are paid in lump sums at designated intervals. The employer thus does the right thing while the loyal employee is duly rewarded. What could possibly go wrong?

Enter here the labyrinth of California employment law. Well-meaning employers initiating bonus programs may face a triple whammy in the form of (1) wage-payment penalties, (2) overtime-pay liabilities, and (3) wage-statement liabilities. But don’t give up! Here are a few pitfalls endangering the well-intentioned California employer and some thoughts on how to avoid them.

Wage Payment Penalties. California employers that willfully fail to pay wages earned through the last day of employment owe penalties for every day that payment is delayed—up to 30 working days—measured by the amount of the daily wage. And other penalties apply to late payments of wages.

But what’s that got to do with bonuses? A bonus is a form of wage. A worker who leaves the company during a bonus program may claim entitlement to bonus money allegedly earned through the last day of employment, and argue that a pro rata bonus must be paid, along with all other wages, by the last day of employment. Employers who are not prepared to honor such a claim should have their bonus program specify that employees must remain employed on designated dates to be bonus-eligible. Employers thus have specified that the bonus is in part a reward for remaining employed through the pay date, or that the bonus is not calculable until a designated date, to preempt any mistaken notion that the bonus somehow was due earlier than when the employer is prepared to pay it. In the absence of an express eligibility requirement, California courts have held that employees who terminate employment may be entitled to a portion of a bonus. Even with such a requirement, courts might hold that an employee may be entitled to a pro rata portion of a bonus if the employee was fired without cause.

Retroactive Bonus Pay. As faithful readers know, both federal and California law require employers to include nondiscretionary bonuses in the “regular rate of pay” used to calculate overtime premium pay. Accordingly, the bonus paid to a nonexempt employee should include retroactive premium pay for overtime hours worked during the bonus period. Consider a biweekly bonus of $180 earned during a period in which the employee worked 80 regular hours and 10 overtime hours. Under the federal method—and also under the California method for “production” bonuses—the overtime formula would divide the $180 bonus by the 90 hours worked, yielding a regular bonus rate of $2. The employer must add $2/hour * 0.5 * 10 hours, or $10 in retroactive overtime pay, to augment the $180 base bonus.

Failure to pay these overtime wages can trigger penalties—both in the form of waiting-time penalties for employees who leave the company and for all employees in the form of penalties for the late payment of wages. What’s more, any bonus that California considers a “flat sum” bonus would require a special overtime formula. In our example, the $180 bonus would be divided by only the regular hours of 80, to yield a regular bonus rate of $2.25. That rate would then be multiplied by 1.5 (not 0.50) to yield retroactive overtime pay in the amount of $2.25/hour * 1.5 * 10 hours, or $33.75. Accordingly, California employers may seek to structure bonuses as production bonuses (e.g., $x per hour) as opposed to flat sum bonuses (e.g., $y per period).

But employers need not fall into an abyss of disenchantment and abandon such incentives or bonuses altogether. Wise employers can seek to navigate around overtime-pay issues by structuring bonuses in the form of a stated percentage of all earnings (including overtime earnings) that an employee achieves during the bonus measurement period.

Wage Statements. Under Labor Code section 226, employers must furnish itemized wage statements to record various items of information, including “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.” Reporting bonus payments accurately can be a challenge. Employers reporting bonuses on the wage statement as simply a lump sum have incurred large wage-statement penalties, in the amount of statutory penalties of $50 per employee and civil penalties of $250 per employee. One California case held that a wage statement need not record hourly rates and hours worked for a bonus where the bonus hours were worked during a prior pay period, meaning that there were no “applicable hourly rates in effect during the pay period” covered by the wage statement. But that case is unpublished and not precedential. Absent more authoritative assurance, California employers are best advised to report, on the wage statement corresponding to the bonus payment, as much detail as is practicable with respect to calculation of the bonus.

Workplace Solutions. Employers that initiate bonus programs to meet the COVID moment have nothing but admirable intentions, and deserve commendation, not condemnation. But California employers who create bonuses create correlative obligations. In structuring a bonus program with those obligations in mind, and in ensuring that the obligations are met as they come due, please don’t hesitate to contact your favorite Seyfarth lawyer. And for any other COVID related questions or concerns, feel free to visit Seyfarth’s COVID-19 Resource Center.