When Are Pay Bonuses Not Discretionary?

When an employee leaves a job for a better opportunity, many unforeseen things may come up. An employer will often attempt to cover any monetary losses from losing a great employee, though any action an employer takes is governed by the employment contract the employee signed at their start. If this initial agreement included a bonus structure it, becomes a non-discretionary part of one’s income and must be paid.

Both employers and employees should be aware of whether bonuses are discretionary, meaning the employer can choose whether or not to give the bonus. The law says that bonuses are discretionary if the “payment is to be made and the amount of the payments are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the Employee to expect such payments regularly.”

If a business believes a bonus is discretionary, the law might disagree with that view.

In Minnesota, employers know that they must pay the employee’s regular rate for earned wages upon termination of any contract. The issue of bonuses is often contested, but the statutes are fairly clear: When a Minnesota employer terminates an employee, it must pay all “wages or commissions actually earned and unpaid at the time of the discharge”—on the next regularly scheduled payday, or within 24 hours of receiving a demand for payment.

On top of that, when a Minnesota employee resigns, the “wages, overtime pay or commissions earned and unpaid at the time the employee quits or resigns” must be paid on the next regularly scheduled payday following the employee’s final day of employment.

There are stiff penalties for withholding bonus payments that are non-discretionary. Examples of non-discretionary bonuses include:

• Holiday bonus
• Attendance bonuses
• Production bonus
• Hiring bonuses
• Group production bonuses

• Referral bonus

As the statute notes, “Employers who fail to pay within the required time period are subject to a penalty of up to 15 days of the employee’s average daily earnings (regardless of the amount of wages at issue) and payment of the employee’s attorneys’ fees.” Employers and employees often fight over whether the statutory definition of “wages” applies to bonuses.

Thankfully for employees, Minnesota courts generally resolve these disputes by applying traditional contract principles. They look to the terms of the bonus agreement to determine whether the employer agreed to pay a bonus, and they also ask whether the employee met the requirements to earn the bonus.

Employers can protect themselves from being locked into a bonus structure that may be unfavorable to them by properly drafting contracts that use clear and concise language. If, as an employer, you do not wish to pay out non-discretionary bonuses upon termination, expect to pay more in penalties and legal fees than the bonuses would have cost.  

If you are an employee being denied a bonus, make sure you contact a reputable and experienced employment law attorney for legal advice to resolve any conflicts. For more information about this area, see our overview of wage and hour laws.