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Design your bonus program with the FMLA in mind

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in Compensation and Benefits,FMLA Guidelines,Human Resources

Pennsylvania employers can look to a recent 3rd Circuit Court decision to keep their bonus plans in compliance with the FMLA. The case is the first of its kind in the country and provides employers with guidance beyond that found in the FMLA's regulations. The decision is now law in Pennsylvania, Delaware, New Jersey and the Virgin Islands.

Facts of the case

An employer offered a full bonus to employees who worked at least 1,950 hours in a given year. Employees who worked fewer than 1,950 hours saw their bonuses prorated.

For example, employees who only worked 90 percent of the required 1,950 hours received 90 percent of the full bonus. The plan included sick and vacation time as "hours worked" for bonus purposes, but excluded time lost to disability leave.

One employee took eight weeks of short-term FMLA disability leave. As a result, the company prorated his bonus. He filed suit claiming the company penalized him for taking FMLA leave. (Sommer v. Vanguard Group, No. 05-4034, 3rd Cir., 2006)

Two kinds of bonuses

The court noted that federal FMLA opinion letters discuss two types of bonus programs: "employee production" bonuses and "absence of occurrence" bonuses.

Employee-production bonus programs pay bonuses based on specific production achievements, such as meeting sales targets within a given time frame.

On the other hand, absence-of-occurrence bonuses reward employees for performing normal job activities on a consistent basis. Attendance bonuses (avoiding sick days) and safety bonuses (no workplace accidents over a given period) are examples of absence-of-occurrence bonus programs.

FMLA regulations say that employers can't reduce employees' bonuses under an absence-of-occurrence bonus due to an employee's use of FMLA leave. (An employee who had perfect attendance before FMLA leave earns his full bonus because he would have received it if he didn't take any FMLA leave.)

However, employee-production bonuses are a different animal. Employees don't accrue the right to the bonus until they meet specific production standards. Employee-production bonuses are earned through production. No production, no bonus.

Which kind of bonus is this?

The employee in this case claimed that working the 1,950 hours was really an attendance bonus. But the employer insisted that it was a production bonus: Employees had to "produce" for 1,950 hours before they were eligible.

The 3rd Circuit sided with the company, saying the deductions were legal. Reason: Because the plan specifically stated that employees who missed time for short or long-term disability, retirement, workers' compensation, leaves of absences or FMLA leave would have their bonuses prorated, it did not single out FMLA leave-takers for bonus reductions.

What this new ruling means for Pennsylvania employers

Work with your attorney to review your bonus plan in light of this ruling to ensure that it complies with FMLA regulations.

Plus, recognize that other laws may influence bonus structures. Have your attorney review the bonus to ensure it doesn't destroy employee exemptions under the Fair Labor Standards Act (FLSA). Also, remember that the FLSA requires you to include nondiscretionary bonuses in nonexempt workers' base pay when calculating overtime pay.  

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