With the holidays and the year end just around the corner, many employers, including law firms, choose to reward their employees with bonuses and/or gifts. Like most things in life, these bonuses and gifts may have unintended legal and practical consequences. The purpose of this article is to provide a “heads up” on some issues that could arise.

• If you talk about a possible bonus during the year, be clear on what criteria must be met for the employee to be eligible, or make it clear that the existence and amount of a bonus is entirely within the employer’s discretion. Otherwise, an employee who quit or was fired during the year may claim to be entitled to a full or pro-rated bonus at year end. If the bonus is based on group performance, profit margins, individual efforts, etc., be specific about what these terms mean, or be clear that there are no specific promises or criteria or “past practice” upon which the employee can reasonably rely.
• A discretionary bonus can be compensation under an implied contract if given regularly so as to create an expectation that it will continue. Courtesy Ford, Inc. v. Byrne, 108 Wn. App. 683, 32 P.3d 307 (2001), rev. denied, 146 Wn. 2d 1019 (2002). Employees who are paid a bonus every year in the same or increasing amounts over time may be entitled to a pro-rata share of a bonus upon leaving employment. Simon v. Riblet Tramway Co., 8 Wn. App. 289, 293, 505 P.2d 1291, rev. denied, 82 Wn. 2d 1004, cert. denied, 414 U.S. 975 (1973). Thus, if you do not intend for the bonus to become a binding expectation, be clear about the intent.
• If the bonus requires employees to be employed at year end to receive it, employees may hold on until year end to be eligible for the bonus and then quit immediately after receiving it. Be alert for signs of employee dissatisfaction so that you are not faced with a need to hire replacements for employees who quit without advance notice.
• Manage employee expectations throughout the year. If you do not have a specific bonus program but have told employees you will give them a bonus if things go well, your failure to follow through may cause employees to quit. These expectations can be managed by giving employees a sense during the year as to whether the employer and the employee are meeting or exceeding their goals. Also, if you are telling the employees that there are no funds available for bonuses but you buy a new car or house or boat, you may lose employee’s trust, leading them to work less hard or quit.
• Bonuses are taxable income. Be sure that you withhold appropriately and that employees are aware of the effect of withholding so that they do not overextend themselves on holiday spending due to an expectation that they will receive the full amount of the bonus instead of the net amount after taxes. Alternatively, bonuses can be grossed up to cover taxes, but it will cost the employer more.
• Gifts to employees can be taxable too. According to IRS Publication 17, “If your employer gives you a turkey, ham, or other item of nominal value at Christmas or other holidays, do not include the value of the gift in your income. However, if your employer gives you cash, a gift certificate, or a similar item that you can easily exchange for cash, you include the value of that gift as extra salary or wages regardless of the amount involved.” Thus, one unintended consequence of a generous gift to employees is the need to withhold taxes from their paychecks based on the value of the gift.
• Be fair in your gifts, especially if they are handed out in a public forum such as a holiday party or luncheon where the person who is left out could be publicly embarrassed by the omission. Keep in mind that employees will compare bonuses and gifts with each other, and that unexplained disparities can lead to employee dissatisfaction that could negatively affect performance, which is probably the opposite of the employer’s intent in giving the gift or bonus. Fairness can become a legal issue, too, if the gifts or bonuses have a disparate impact on employees in protected classes, such as people of a certain age or race or religion receiving all of the bonuses.

Enjoy the holidays!