Discretionary vs. Non-Discretionary Bonus: What's the Difference?
UPDATED 11/1/2023 - In the dynamic world of medical practices, employees jump from team to team to find what they think are better opportunities.
To counter this trend, many practices try to retain team members by creating bonus systems. In particular, two kinds of bonuses exist: discretionary and non-discretionary. Because it will impact an employee's compensation and their overtime calculations, it's important to understand the distinction.
What is the difference between discretionary and non-discretionary bonuses? The simplistic answer: one is tied to a metric or expectation that needs to be met for the employee to earn the bonus (non-discretionary), while the other is given without any requirements attached to it (discretionary). However, in this guide, we'll take a deep dive into the differences, so you know when you're giving one kind of bonus and not the other.
Just Like it Sounds: Discretionary Bonuses are Up to the Employer
First, a discretionary bonus has the following characteristics:
It's based solely on the employer's discretion.
- If you like the performance of your dental assistant, give them a bonus. That's discretionary. If you want to give it to them in February or October, that's fine. It's your choice. That's discretionary.
The amount is variable.
- If you want to give $5,000 to everyone on your team because that's what you did last year, then go for it. If you want to give $100 to your veterinarian technician because you liked what she did in February, then do it. It's discretionary. What is important is that you document why different bonuses are given for each person. You should have written documentation that explains why different levels of bonuses have been given.
It's a non-recurring giveaway.
- Nothing in the law requires you to continue giving any particular discretionary bonus. It can happen once, twice, or 50 times. It's up to you.
There is no expectation of payment.
- While a culture of bonuses may exist in your practice, a discretionary bonus by law creates no assumption that payment will come.
Under the Fair Labor Standards Act (FLSA), very few bonuses are discretionary.
Something to note is that in the case of any bonus, you should always be able to clearly communicate the “why” behind any differences in the amount to avoid claims of unfair/discriminatory treatment.
The bottom line is this: if it's a discretionary bonus, it's up to you as the head of your practice to decide when, how much, to whom, and how often to give your bonus.
Non-Discretionary Bonuses are Predictable and Expected
If a discretionary bonus is completely up to the employer, what is a non-discretionary bonus? Simply put, a non-discretionary bonus is predictable and expected. Here are a few important things to keep in mind:
It's determined through the employee's service, productivity, or efficiency.
- For example, perhaps your dental practice provides a bonus of $1,000 if employees have 95% attendance in a given year. If an employee has 95% attendance in a year, guess what? You must give that $100 bonus. That is an example of a non-discretionary bonus.
It's predetermined by specific criteria that are known to both employer and employee.
- Perhaps it's stated that if your optometrist practice nets $100,000 in revenue in a month, then everyone on the team receives $100 in a bonus.
If it's a non-discretionary bonus, there's no guesswork as to what's required to earn that bonus. It's written clearly for both employer and employee to see.
The FLSA requires that non-discretionary bonuses are included in an employee’s regular rate of pay for overtime purposes.
- This is important not only because you should pay the overtime that's owed, but also because the penalty imposed by the state can sometimes be more than the overtime that the employee is owed.
Non-discretionary bonuses are often used as motivation to employees.
- Unlike a discretionary bonus, which can appear out of thin air, employees may very well be motivated to get a non-discretionary bonus, based on the work that they do.
It is common practice for employers to label bonuses that should be non-discretionary as discretionary.
- It is unethical and illegal to do this. Make sure that you call non-discretionary bonuses non-discretionary when they're meant to be non-discretionary.
If you're wondering how to handle non-discretionary bonuses, HR for Health's timekeeping system will help you with this.
Use Bonuses to Boost Office Morale
When done properly, bonuses — both discretionary and non-discretionary — can be extremely beneficial to your practice. They can be used to incentivize behavior that goes above and beyond the call of duty, boost office morale, and reward employees who do excellent work. Of course, when done wrong, they can have the opposite effect.
Regardless of the type of bonus you offer, you should always make sure that you communicate when a bonus is to be expected, why it has been earned, and the rationale behind each bonus that is given. Doing so will not only improve office morale but ensure that your employees know why bonuses have been distributed. This can up a healthy system in which your employees work to perform well beyond their normal job duties, benefiting themselves and your practice.
How HR for Health Can Help
If you want to know more about how your medical practice can do bonuses right, contact HR for Health. We know the importance of a timekeeping system that calculates overtime correctly for you based on your state's regulations, and both types of bonuses can be accommodated in our all-in-one HR software solution. HR for Health calculates these for you.
If you want to go further, set up a consultation today!