by Patrick M. Ngalamulume
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Get Your Report Now!Q A new hire was given a $5,000 sign-on bonus but has been a no-show for numerous days, and we haven’t been able to contact them. Can we withhold and/or deduct from this employee’s final paycheck to recoup some of the sign-on bonus?
A Whether you can deduct from this employee’s final check to recoup some of the sign-on bonus depends on whether the bonus is structured as a discretionary or nondiscretionary bonus. Under the Fair Labor Standards Act (FLSA), discretionary bonuses are excludable from the regular rate of pay.
The Department of Labor has stated that a bonus is discretionary if it satisfies these criteria: (1) The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; (2) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and (3) the bonus payment isn’t made according to any prior contract, agreement, or promise causing employees to expect such payments regularly. If the bonus fails any of these prongs, it’s considered nondiscretionary.
Under these criteria, a sign-on bonus is nondiscretionary because it fails to meet the statutory requirements of a discretionary bonus under the FLSA. Also, nondiscretionary bonuses are included in employees’ regular rate of pay. In most cases, a sign-on bonus is considered nondiscretionary because it’s usually promised to employees as an incentive to accept a job offer and is dependent on the employees’ starting work.
If your employment agreement explicitly states the sign-on bonus depends on the employee’s remaining with the company for a specified period, you have contractual grounds to recoup the bonus. Common terms might include that the bonus must be repaid if the employee leaves the company before a specific date.
However, even if you have the right to recoup the sign-on bonus, any deductions from the employee’s final paycheck must comply with federal and state wage laws. Specifically, the deduction must not reduce the employee’s pay below the minimum wage for hours performed. To proceed, review the employment agreement to determine the specific provisions related to the sign-on bonus and continued employment requirements.
Finally, consult with your legal counsel to ensure any deductions comply with applicable wage laws and that you aren’t exposing your company to the possible liability of a wage claim. By following the proper legal protocols, you can minimize the financial impact on your company while complying with all relevant employment laws.
Patrick M. Ngalamulume is an attorney in the Boise office of Parsons Behle & Latimer. Patrick is a member of the Intellectual Property Transactions and Litigation practice teams and focuses his practice on all aspects of business, including drafting, negotiating, and advising on contracts; licensing of technologies; corporate compliance; entity formation and governance; and commercial transactions. He can be reached at 208-562-4900 or pngalamulume@parsonsbehle.com.