In an industry ravaged by labor shortages, keeping your workforce happy is a great way to reduce turnover and improve your bottom line. In the past, we’ve recommended being flexible with schedules, providing opportunities for advancement, and offering competitive salaries. Many employers go above and beyond by offering holiday and end-of-year bonuses to their workers — a generous gift that is sure to brighten the day of your most valued workers. But as with anything in the construction industry that involves money, there are several factors that must be taken into account, including the legality of supplemental wages.
In this article, we discuss how you can keep bonuses legal and fair. While your workers will be thankful no matter the bonus they receive, your business could be investigated by the Internal Revenue Service (IRS) if you fail to accurately represent your business’s finances during tax season. Consult a Florida construction lawyer with any legal questions you may have pertaining to initiatives such as these.
Bonuses Aren’t Tax-Free
As a construction law firm, we’d be remiss if we failed to mention that bonuses aren’t tax-free. It is illegal to give bonuses without first withholding taxes. As supplemental wages, bonuses are subject to the same taxes as all other wages — federal income tax, social security tax, state income tax, etc.
You can withhold taxes one of two ways. You can either identify the supplemental wages separately from regular wages, in which case you would withhold a flat 22 percent, or you can add them to the employee’s regular wages and calculate the income tax withholding from the new total. Always remember to report supplemental wages on your employees’ W-2s forms for the year in which it was given.
Bottom line: no matter how you decide to distribute bonuses to your workforce, always keep it legal by withholding taxes.
Find the Approach That Works for You
Many employers are opposed to the idea of handing out bonuses. After all, an employee’s salary is something that was negotiated prior to them starting work. In an employer’s mind, an agreement has been made — the employee does X amount of work and the employer, in turn, pays Y. Bonuses should be earned; if you agree with this sentiment then an incentive compensation program may be right for your company. These bonuses are based on merit and encourage your employees to set goals and stick to them. Other forms of bonuses are based on gifts and profit-sharing.
It’s an incredible gesture to give back to your employees, it truly is, but you must be sure that you are doing what is best for your business. By setting up an incentive compensation program, you are creating a transparent system that encourages your employees to put forth their best effort each day. However, there may be other employees, such as those in office roles, for whom this system would not benefit. You also run the risk of withholding a bonus based on factors beyond a worker’s control. There’s no one-size-fits-all answer to which approach you should use, but there are definite steps you should take once an approach is decided on.
Have a System In Place
Regardless of the approach you choose, it’s important to have a system in place and stick to it. You don’t want to end up in a situation where employees were assured a bonus only to find that you can’t afford it this year. Similarly, you don’t want to leave employees empty-handed if they received bonuses the previous year. Remember, even if you give bonuses on a single occasion, you are setting a precedent.
Above all else, you must put it in writing if you’re going to be handing out bonuses. If bonuses are non-discretionary, meaning they are paid as a result of an employee hitting a goal, it should be clearly stated in their employment contract. If bonuses are discretionary, meaning they are based solely on the employer’s discretion, it should also be stated in their contract. You’d be surprised by how many legal disputes could have been avoided if terms like these were clearly stated in the contract. If you’re interested in updating your employee manual to include these stipulations, consult one of our Florida construction lawyers from Cotney Construction Law.
Related: Is Your Employee Handbook Current?
Give Praise Where Praise Is Due
Finally, take your workers aside and explain the policy to them in detail. If you think this takes the “magic” out of holiday bonuses, well, so does breach of contract and violating employment law. Aside from a fair salary and bonus, what your employees want most is respect, honesty, and recognition. Our advice to you: bonuses are a great idea for improving morale, but your first step in keeping your workers happy should be:
- Giving praise where praise is due
- Being honest about the challenges and limitations facing your company
- Showing workers that you care about their day-to-day struggles and are always striving to improve processes
- Making safety a number one priority
There may come a time when your company is unable to give out discretionary bonuses. When money is tight, you’ll be thankful for treating your loyal workforce with respect. Remember, whether you’re handing out bonuses or listening to a complaint, you are making an investment in your workforce and ensuring that your business thrives, regardless of labor shortages. For assistance putting together an employee manual that contains necessary information regarding discretionary and non-discretionary bonuses, consult the team of Florida construction attorneys from Cotney Construction Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.