The holidays are upon us, and for many employers, this means
bonuses and performance reviews. While
both activities may seem harmless – even positive – handled improperly, they
become legal landmines. So, how do you
handle these year-end rituals without exposing the organization to unnecessary
Year-end bonuses, especially when unexpected, are arguably
one of the most appreciated gestures organizations do for their employees. So, where’s the harm in that? It’s not necessarily the bonus itself that
creates the potential for liability; rather, it’s the process of determining
who gets one and how much.
Simply put, the less subjective the criteria, the
better. Amounts that appear arbitrary
from one employee to the next or unrelated to anything employees can understand
open the door for claims of discrimination and favoritism, particularly when it
appears members of a protected class (age, race, sex, etc.) receive lower
amounts than others. The following are best practices for
creating a bonus system free of discriminatory bias that employees are more
likely to trust.
· Criteria should be objective and measurable,
such as documented productivity or pre-set performance standards. Any reductions in bonus amounts should be
documented with legitimate and quantifiable data.
· Be mindful of when absences and/or a correlating
reduction in productivity that result in a lower bonus may be viewed as
retaliation for exercising a legal right, such as the Family and Medical Leave
Act (FMLA) or the Americans with Disabilities Act (ADA). Criteria impacted by these things should be
documented with extra due diligence.
· Ensure bonus amounts, particularly those rooted
in discretionary criteria, are reflective of the employee’s performance reviews
or any issues with attendance or conduct.
If an employee has been under disciplinary action, higher bonus amounts
call into question the employer’s motives.
· Managers involved in the determination process
should be trained in issues surrounding discrimination, retaliation, and bias.
· Carefully review bonus amounts for unintended
effects, such as those in a protected class consistently receiving lower
amounts. Even outcomes that are meant to
be fair and neutral can result in illegal discrimination if the effect appears
discriminatory or has a particularly negative impact on those in protected
· The entire process should be documented, and
documentation used in calculations should be maintained. Any contractual obligations – explicit or
implied – in employment agreements, company policies, etc., should be
As an aside, under the Fair Labor Standards Act (FLSA),
non-discretionary bonuses must be included in non-exempt employees’ regular rate
of pay when calculating overtime, whereas discretionary bonuses do not. Even holiday bonuses may be considered
non-discretionary, depending on employee expectations of such bonuses and the
criteria used for calculation. Employers
should scrutinize their bonus structure closely to determine if it is
non-discretionary. See https://www.dol.gov/whd/StateandLocalGovernment/CA_Tutorial/media/OT%20Examples%20Final.htm
for additional information about overtime calculations with non-discretionary
The annual performance review is also a year-end ritual for
many employers. Used as a basis for pay
decisions, promotional opportunities, and disciplinary action, a poorly
designed or executed performance management process is a hotbed of legal
liability. So, what are some common risks
in this process?
· Assessing the person instead of the performance.
Focus on definable activities and
measurable results, not personal traits.
· Infrequent or insufficient feedback. Feedback should be thorough, ongoing, and in
real-time. Formal performance reviews
are merely one possible step in an effective performance management system.
· Lack of facts or specifics. Relying on memory or using “I think” or “I
feel” statements does not result in quality feedback that the employee can
translate into action.
· Not measuring the right things. Irrelevant factors or focusing solely on
final output does not result in meaningful feedback that promotes growth and
· Lack of manager accountability. Missed, late, or sloppy reviews should not be
tolerated. A manager’s performance
review should address adherence of the process with his direct reports.
· Lack of manager training. A manager who is not trained on how to
measure and document performance is arguably the most dangerous element of the
· Focusing only on problems and not
solutions. Effective performance
management means ensuring employees have the skills, knowledge, and resources
to succeed or correct deficiencies.
There should be clear correlations between the employee’s job, the goals
of the department/organization, what performance appraisals measure, and
· Surprises or avoidance. An “official” review should merely formalize
what the employee already knows and has been coached on throughout the
year. Unexpected negative feedback calls
the manager’s motives into question and erodes trust and morale.
· One-way process or communication. Employees should be active in the
goal-setting and review process, including a means of challenging an appraisal
with which they disagree.
A closing thought about rewards in general: While bonuses and pay raises are certainly the
most familiar outcome of performance reviews and year-end activities, the
importance of non-financial recognition cannot be overstated. Appreciation that is personalized and sincere
goes a long way toward increasing loyalty and morale. A personal letter from the CEO, a gift to the
employee’s child or pet, or a donation to a charity of the employee’s choosing
are just a few examples of thoughtful recognition that show you know your
employees and appreciate what matters to them.
Financial rewards fill financial needs, whereas these other types of
recognition bring social and emotional satisfaction. Just be certain to always consult with your
accounting team to determine the taxability of any rewards you are
considering. Cash, or anything that
could be construed as a cash equivalent is nearly always taxable, no matter how
small the amount.
By Charlotte Jensen, Vice President, HR Compliance – Affinity HR