“It’s the most wonderful time of the year.”

—Unknown

An employer inquires whether they are free to give certain gifts or incentive awards to nonexempt workers. Specifically, the employer wants to know whether there are wage and hour concerns arising from furnishing nonexempt employees a $25 gift card. The short lawyerly answer is… it depends.

The client didn’t ask us about the tax issue, but please be warned, we are concerned there may be no de minimis $25 or less rule for gift cards under the latest tax deduction rules. It is possibly not deemed to be a deductible business expense, at least in our understanding. But we are not tax attorneys and we don’t give tax advice.

The primary legal wage and hour issue is whether these $25 gift cards must be included in the regular rate of pay, and thus operate to boost up any overtime pay due the worker who receives such a “gift.” We suppose the answer to that question could also depend on the facts including the frequency of the payment, the criteria used to assign the gift cards, and whether the potential grant of gift cards is announced in advance, or held up as a carrot of sorts that can be eaten for doing certain levels of effort or work. DOL’s recently issued new regular rate regulations went into effect on January 15, 2020 and are largely untested. The final rule clarifies when payments for forgoing unused paid leave, payments for bona fide meal periods, reimbursements, benefit plan contributions, and certain ancillary benefits may be excluded from the regular rate. However, the final rule does not deal directly with gift cards or other cash equivalent type gifts.

This means that the issue of the gift cards likely comes down to an analysis of whether the gift card is discretionary or nondiscretionary, just like any cash bonus payment. The final rule also offers the following clarifications regarding kinds of discretionary bonuses which may be excluded from the regular rate of pay:

·        bonuses are discretionary and excludable if both the fact that the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond. 

·        and they are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

 Examples of bonuses that may be discretionary include:

·        bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria. 

·        severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities.  

·        bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. Such bonuses are usually not promised in advance and the fact and amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.

29 C.F.R. §778.211 (effective Jan. 15, 2020). Accordingly, if the gift cards are furnished by the employer for “unique or extraordinary efforts” or for “challenging or stressful situations”, or for an “employee-of-the-month” bonus, the gift card would likely fall within these new safe harbors.

If these circumstances are inapposite, then we look to the traditional bonus rules of law to decide if the gift cards should be excluded. In order for a bonus to be “discretionary” the employer must continue to exercise discretion over the payment of the bonus and the value of the bonus. 29 C.F.R. §778.211(b). Therefore, to qualify, the employer must retain discretion over these factors until near the end of the period. If the employer promises the bonus beforehand, he forfeits the ability to exempt the payment. The regulations further say that a promise in January, of a bonus in June, would forfeit the employer’s ability to exempt the payment. If an employer tells his employees that they would receive a certain bonus based on the numbers of hours worked, the bonus will become non-discretionary because they will be expecting a bonus once they reach the specified number. This is not to say that the employer cannot plan 6 months in advance to give a bonus, nor to qualify that bonus on hours worked, only that the employer cannot promise or announce the bonus to the employees because the bonus would then become non-discretionary. 29 C.F.R. §778.211(b).

In addition, these bonuses cannot be paid pursuant to a prior contract or agreement. They may not be promised at the start of employment, or pursuant to a collective bargaining agreement because then they would not be discretionary. Those that are announced for the purposes of inducing employees to work better, quicker, or more efficiently are also not exempt. 29 C.F.R. §778.211(c).

Recently, albeit prior to the issuance of these new regular rate rules, similar principals were used to resolve situation involving $100 gift cards, which we find to be instructive. In Frausto v. Bank of Am., Nat'l Ass'n, 2019 WL 5626640, at *6 (N.D. Cal. Oct. 31, 2019) the court determined that Bank of America’s gift card scheme was a discretionary bonus and therefore excludable from the rate of pay. There, employees nominated other employees for performing above and beyond. Management would then look at the nominations and decide whether or not to award points. Once an employee received a number of points, they could redeem them for gift cards but not cash. The court’s opinion hinged on the discretion employed by management when deciding to award points based on the nominations. Id. In the Fausto  case, the District Court in California believed that gift cards could take the form of a discretionary bonus. The discussion centered on the discretionary aspects of the gift card rather on the type of remuneration.

Accordingly, we think the risk is low where:  

·        The payment is a low dollar sum, and there is no promise of payment or formal employment plan offering up a payment or making it some regular form of compensation for hours worked.  

·        The payment can be structured to fall within one of the safe-harbor reasons set forth in the new regular rate regulations like “unique or extraordinary efforts” or  for “challenging  or stressful situations”, or for an  “employee-of-the-month” bonus, all of which are ostensibly excluded now from the regular rate calculations. 

·        If the employer refrains from announcing in advance the plans to give away gift cards, or the formula by which they select who receives the gift cards, it is likely that the gift cards will be exempt from the regular rate.

But low risk doesn’t mean no risk. It is possible the gift card grant could be deemed compensation for hours worked. If you can live with some ambiguity, then try to slot your gift into the existing case law by making the award of the gift card conditioned upon “unique or extraordinary efforts” or  for “challenging or stressful situations”, or for a “worker-of-the-month” bonus. Don’t just widely pass out gift cards to large numbers of workers simply based on their efforts.