Legal Ease: Business Decisions Matter
August 26, 2008
Plan an incentive program badly and you could owe employees for phantom overtime
By George B. Delta, Esq.
Employers have learned enough these days to make sure they take taxes into account in structuring incentive programs. For example, most companies are aware of the tax benefits of a safety achievement or a length-of-service award program, and structure their programs in order to take advantage of them. Similarly, smart employers engage in tax planning in order to mitigate the tax cost of their taxable incentive award programs, and most such programs are taxable. While employers have become more sophisticated in their tax planning, sometimes they have forgotten to take into account some important non-tax considerations in running incentive programs.
One such non-tax consideration for a taxable incentive program is the Fair Labor Standards Act (FLSA). The FLSA and its regulations generally require an employer to include in an employee's regular rate of pay all remuneration except certain specified types of payments. Thus, discretionary bonuses, gifts, payments in the nature of gifts on special occasions, contributions to certain types of welfare plans, and payments to certain types of profit-sharing, thrifts and savings plans are not included in an employee's regular rate of pay. Nondiscretionary bonuses are included in an employee's regular rate of pay. Accordingly, prizes awarded for perfect attendance, good safety records, excellent service and the like are generally considered to be additional remuneration for employment and require that their value be rolled back into the employees' regular rate of pay for overtime purposes.
For example, if all employees can earn some prize automatically by attending safety meetings, by having a perfect safety record or getting a certain customer service rating, over a period of time such as one month, the prizes would probably be treated as additional remuneration earned by the employee for his employment. The value of an award is considered remuneration that is added to an employee's regular rate of pay for overtime purposes. Therefore, if an employee works a substantial amount of overtime, this additional remuneration that an employee will be deemed to have earned may require the company to pay him or her extra overtime.
As a practical matter, this means that the employer would have to gross up the value of the award to time and one-half to reflect the overtime worked. So, a taxable incentive program may end up requiring the employer to pay employees for phantom overtime as well.
Just as incentive programs can create an additional cost if you make an uninformed decision, knowing your business partner can make a big difference in the incentive field. For example, some companies are finding out that your business partner matters, as a result of the Sharper Image bankruptcy. When the company filed for bankruptcy, it stopped accepting its gift cards for redemption. As a result, the gift card holders became unsecured creditors of Sharper Image, and they are extremely unlikely to recover anything for any one of a variety of reasons.
This development involving Sharper Image has nothing to do with the incentive business or the use of gift cards. The moral of the Sharper Image bankruptcy is different. As with all types of business relationships, knowing your partner and its financial viability is the most important aspect of the incentive business.
George B. Delta, Esq. is general counsel to the Incentive Federation Inc. and a frequent contributor to this magazine. Send comments to gdelta@garyreg.com.
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