Year-End Bonus: What You Need to Know

End of Year Bonus

Photo by: Jean Labosnyk

It’s time for reviews, year-end bonus, and raise determinations. I thought this would be the perfect time to get a better understanding of bonuses.

What is a Bonus?

A bonus is something “extra” that an employer provides to employees without the obligation to do so. Nevertheless, they are considered wages and are governed by state and federal wage and hour laws.

Why give Bonuses?

As an employer, employee bonuses are a great idea if you could afford it. Although money is not the only motivator in employee performance, it is nevertheless an effective motivator. More importantly though, a bonus demonstrates your appreciation for your employees’ hard work and performance throughout the year.

Different Types of Bonuses

Bonuses may either be “earned” or “discretionary.”

A business may have a compensation plan that incentivizes employees with a bonus of they hit a certain yearly sales goal, work a certain number of hours in a year, or based on the company’s profits for the year. When there is a criteria that an employee has to meet, then employees earns the bonus when they meet the criteria.

A discretionary bonus is something that an employer is not obligated to provide and can decide how much and to whom for any reason or for no reason at all.

Bonuses are Wages

Both “earned” and “discretionary” bonuses are considered “wages” under the California Labor Code. Thus, all the regular rules related to the payment of wages apply. For example, they must be paid timely, reflected on itemized wage statements, and taxed accordingly. Earned bonuses must also be paid out at the time of termination of the employment relationship.

A word of caution regarding discretionary bonuses, any time an employer has discretion when it comes to pay, make sure that similarly situated employees are treated the same. This is especially important since California’s new equal pay law goes into effect on January 1, 2016.

How do Bonuses Affect Overtime Pay?

Earned bonuses provided to non-exempt employees must be included in the calculation of an employee’s regular rate of pay for the purposes of calculating the overtime rate. Learn more about calculating California Overtime.

Discretionary bonuses, on the other hand, are not included in the calculation of an employee’s regular rate of pay, and have no effect on the overtime rate.


Whether a bonus is “discretionary” is not easy to determine and should be reviewed by an experienced labor law attorney to make sure an employer does not run afoul of state and federal employment laws. When considering a bonus payment plan, offering employee commissions, handing out end of year bonuses, or giving a discretionary bonus, employers must pay careful attention to the wage and hour laws governing bonuses.

When in doubt contact an experienced employment law attorney to help you navigate through this area of the law.

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In: Employment Law, Uncategorized

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