FAQ: Wage and Hour Risks of Paying COVID-19 Vaccine Incentives to Employees

Last week, President Biden announced a push to make all adults in the U.S. eligible for a coronavirus vaccine by the end of May. With COVID-19 vaccine availability ramping up, more and more employers are having to confront what to do to encourage employees to get the vaccine. Obviously, one option is to require employees to get the vaccine as a mandatory condition of continued employment. That option raises a host of legal and employee relations questions, and the overwhelming number of employers in most surveys have ruled out mandatory vaccination. So what are employers doing? Marriott, Kroger, McDonald’s, Trader Joe’s, Starbucks, Lidl, and Dollar General (among others) are all paying some kind of cash incentive to employees, while other large corporations are sitting on the sidelines. Offering incentives to taking the vaccine may be attractive, but tread lightly. Those paying incentives are taking some significant risk in doing so under both state and federal wage and hour law.

Wage and Hour Laws and the Risk/Reward of Vaccination Incentive Payments

Put simply, the Fair Labor Standards Act (FLSA) requires employers to pay all employees for all time worked. It also requires employers to compensate employees when they are required to spend money for their employer’s convenience if those expenses cut into the employee’s FLSA-protected minimum wages and overtime entitlements. (State or local wage and hour laws may also create similar, or even higher, obligations). Why are cash incentives like those Dollar General is offering a potential issue? Cash “bonuses” (however characterized) for vaccination could be deemed nondiscretionary bonuses under the FLSA.

Non-Discretionary Bonuses

The distinction between a “discretionary” bonus and a “nondiscretionary” bonus is an important one under the FLSA, and not an obvious one. “Discretionary” in the real world means the freedom to decide. In the common sense, any “bonus” is discretionary: there’s no guarantee and there is a separate decision an employer makes to give one. Otherwise, it is just a payment for services calculated in a different way or time.

However, the FLSA defines “discretionary” much more narrowly. Not only must an employer retain the “freedom to decide” whether to pay the bonus but the FLSA also requires that employers retain discretion on the amount of the payment. In addition, the FLSA further limits employers by prohibiting payments made as part of a contract, agreement, or promise that would cause employees to expect the payments. Non-discretionary bonuses abound in the workplace: attendance, production or quality goal bonuses, longevity/service time bonuses, bonuses designed to increase employees’ efficiency or to encourage retention, and more. Again, any bonus payments made as part of a contract, agreement, or promise are non-discretionary under the FLSA. Announcing a payment for COVID vaccination arguably falls into this non-discretionary category.

Why is this non-discretionary category important? An employee’s regular rate of pay generally includes all compensation for employment, including their hourly wage or salary and other monetary payments. Non-discretionary bonuses must be included in that regular rate. Under the FLSA, employers must pay nonexempt employees overtime compensation at a rate equal to at least 1.5 times the employee’s regular rate of pay for all hours worked over 40 in a workweek. Bonuses that have to be included in the regular rate must also be included in the overtime rate.

The value of the COVID-19 vaccination “bonus” increases the per-hour regular rate. To take a simple example, for an employee earning $10/hour and working 50 hours per week, that extra $100 would increase the straight-time rate to $12.00/hour and the overtime premium to $18.00/hour. Multiply that by the number of employees getting a vaccine and the bonus, and you could have a significant wage and hour claim on your hands if you didn’t recalculate properly (or at all).

Vaccination Bonuses as “Gifts”

The wage and hour buffs out there might ask whether a vaccine bonus could be a “gift” under the FLSA. Not likely. Yes, the FLSA allows employers to exclude “gifts” from the regular rate of pay. However, just as “discretionary” in the common sense does not mean “discretionary” under the FLSA, a “gift” is not an FLSA “gift.” Employers must do more than label a payment as a “gift” to avoid potential wage and hour violations. Employers can only exclude truly discretionary gifts, in the same way they can only exclude discretionary bonuses.

Section 7(e)(1) of the FLSA provides that the term “regular rate” shall not be deemed to include “sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.”  The onus is on the employer to prove that a payment meets this exemption. For a gift to be discretionary for FLSA purposes, the same rules apply as to bonuses: the employer (1) must retain discretion both as to whether the payment is made and as to the amount of payment, and (2) the employee cannot have a contractual right to the payment nor can the employer promise any particular amount to the employee.

State laws are similar.  For instance, Florida statutes define wages as “all compensation paid by an employer or his or her agent for the performance of service by an employee, including the cash value of all compensation paid in any medium other than cash.”

Employer Takeaways: Non-FLSA Vaccine Considerations

For non-exempt employees, employers that wish to pay incentives to employees who get a COVID vaccine will likely have to include these payments in their calculations of the “regular rate” under the FLSA (and perhaps state law). That may make them unaffordable or unworkable because of the administrative burdens. For those who are still on the vaccine bonus wagon despite the potential wage and hour issues, though, these aren’t the only issues a direct payment raises.

To me, the biggest issue for employers above all else is employee relations. Giving an express, financial incentive for vaccination (cash, bonus PTO, gift cards, etc.) can be viewed by employees as pitting you against them, depriving the employees of a financial incentive because of their personal health decisions. While my decision (and I hope yours!) is to get vaccinated against the coronavirus, not everyone feels similarly for a wide variety of reasons.

The safest route for employers may be awareness campaigns: get information out to your employees about why vaccination is safe and important for them and for the company. The biggest barrier to vaccination is apprehension due to past individual and community experiences, misinformation, and, in particular, a lack of information. Employees who are well informed about the vaccine’s development, testing, effectiveness, and track record and see leadership from the organization in getting vaccinated are employees who will more likely get vaccinated themselves. There is no risk in this kind of encouragement. It creates few if any employee relations problems because it lacks the element of coercion.