Bonuses are a common form of employee compensation that can incentivize and reward performance to retain high quality employees. On the flip side, employers must navigate legal risks and challenges to ensure compliance with federal and state laws.
As with any matter that concerns payment of wages, bonuses implicate a plethora of legal subjects. This discussion aims to alert employers of some potential issues, but a full and periodic legal review of an agency’s compensation procedures is always prudent.
Familiar Issues
Employers tend to be familiar with discrimination which falls under the Fair Employment and Housing Act and Title VII. Such discrimination may manifest as “disparate treatment” or “disparate impact.
Disparate Treatment
Disparate treatment is intentional discrimination as to similarly situated individuals based on a protected classification, such as race, sex, gender, religion, national origin, or disability. While it would be difficult to “audit” whether a supervisor is doling out bonuses discriminatorily, the employer can minimize the risk of disparate treatment by establishing clear, objective, and written criteria for an employee’s eligibility for a bonus. The employer should encourage employees to report potential unlawful or perceived unlawful conduct to any member of management. Employers should also require management employees to promptly and appropriately address such complaints or face disciplinary action themselves.
Disparate Impact
Disparate impact discrimination occurs when a facially neutral employment practice disproportionately affects members of a protected class, even with no intent to discriminate. A complainant must show that the practice resulted in a significant adverse effect on a protected class, typically through statistical evidence showing a disproportionate exclusion of members of a protected class.
The EEOC applies a general rule-of-thumb known as the “four-fifths rule” to determine if an employment practice has a disproportionate impact. In the context of a bonus, if the ratio between the bonus for one group is less than 80% (four-fifths) of the bonus received by another group, this may indicate a disparate impact.
For example, if a school’s female teachers receive an average bonus of $7000 and its male teachers receive an average bonus of $10,000, the female teachers are receiving less than 80% of their male counterparts’ bonus compensation:
Ratio = $7,000 / $10,000 = 70%
Employers need not wait for a complaint to determine whether its bonus system has a disproportionate impact on a protected classification. Agencies can consult with legal counsel to proactively detect potential disparities.
The Equal Pay Act (“EPA”)
The federal Equal Pay Act prohibits pay disparity between employees conducting substantially similar work on the basis of sex. The California Equal Pay Act similarly mandates equal pay for equal work, but with an expanded scope to include gender, race, and ethnicity.
Essentially, employees of a protected class cannot be paid at a rate less than the rate paid to employees of a different protected class. Employers may defend against an EPA claim by showing that the disparity is the result of (a) a seniority system; (b) a merit system; (c) a system that measures earnings by quantity or quality of productions; or (4) a bona fide factor other than sex, race, or ethnicity such as education, training, or experience. Notably, employers cannot rely on the employee’s prior salary to excuse the disparity.
How to Spot an EPA Issue
Similar to the disparate impact analysis, employers should also proactively investigate whether their bonus systems have resulted in pay disparity between members of different protected classifications. Generally, members of the same job classification should receive bonuses measured under the same metrics regardless of their protected classification. If an employee within a job classification is performing substantially different work, which thereby results in an apparent pay disparity, the employer should consider moving the employee out of class.
Keep in mind that prior salary is never a defense to an alleged pay disparity. This may become an issue if employees within a job classification receive different bonus rates based on their salary step.
For example, a bonus system could establish that employees at step 1 of the salary scale receive a bonus of 5% for satisfactory performance while employees at step 2 receive a bonus of 7% for also satisfactory performance; such bonus systems are not inherently unlawful. However, if the system results in pay disparity between protected classifications, the employer cannot defend the disparity by asserting that the employees were simply at different salary steps. The employer must demonstrate different objective criteria, such as a non-discriminatory reason for placing the employees at different salary steps in the first place (e.g., employees with less than 2 years of experience are at step 1 while employees with more than 2 years of experience are at step 2).
To effectively defend potential legitimate, nondiscriminatory disparities in pay between members of protected classifications, employers should endeavor to detail as thoroughly as possible the objective criteria of their bonus system.
Leave a Paper Trail
As noted above, these are just a few of the several issues employers may encounter when providing bonus compensation. Generally speaking, an employer cannot go wrong documenting its legal activities, and this is true with bonuses. Ideally, agencies should document the reason for any employee’s bonus pay based on written procedures for objective evaluations adopted by its governing body. Clear documentation and adherence to established procedures not only ensure compliance but also foster transparency and fairness in bonus compensation practices.