Companies have increasingly become reliant on bonuses to provide a portion of compensation to employees. Unfortunately, the use (or misuse) of a "bonus" often creates problems for employers. For instance, in regard to loan officer compensation, "bonuses" are likely to come under scrutiny from regulators because to the extent that it is a payment associated with past performance, it essentially amounts to deferred compensation for previously closed loans. Although a "bonus" that was exclusively and clearly tied to objective factors, such as measurable volume, would likely cause few challenges, all too often these bonuses are tied to subjective factors that could easily be impacted by the terms of loans that have been closed. In that regard, such bonuses would amount to compensation directly tied to the terms of the loan in violation of the amendments to Regulation Z.
Beyond the loan officer compensation rules, the very term "bonus" is often misconstrued. Indeed, a "bonus" is something an employer provides to an employee that is neither mathematically calculable nor guaranteed dependent upon conditions precedent. In other words a "bonus" under the law is not an "if you do X then you get Y" situation. Legally, a bonus is a discretionary payment both in terms of whether it is paid and how much gets paid. In fact, a bonus that is definitely capable of determination in either its payment or amount is considered commission. This is relevant to employers because (if you have been reading past blogs) any commission paid is necessarily includable in overtime calculations. Hence, improperly characterized bonuses become liabilities.
Lastly, a bonus (if really a commission) can become a liability to former employees. That occurs because once a commission is "earned" (i.e. all the conditions precedent are satisfied), an employee is entitled to payment eve if he or she is no longer employed at the scheduled time of payment. Thus, if a bonus is in fact a mischaracterized commission, it can create a liability to former employees.
The lesson here is simple–if you want to create a truly voluntary payment to employees, make sure you explain it in such a way that its clear it's discretionary and not capable of mathematical determination. Otherwise, you may be creating a mandatory commission that operates under a set of rules and obligation that you may not have contemplated or expected.
