I’d like to give my employees gift cards worth a few hundred dollars at the end of the year as a holiday gift. Is the value of those gift cards part of their compensation that needs to be taken into account when calculating overtime?
While a gift card may not look anything like a paycheck, an employer should still consider whether it will legally be considered part of an employee’s compensation.
Regular Rate of Pay
Under both state and federal law, most payments to employees are considered compensation that must be included in an employee’s regular rate of pay.
The regular rate of pay is a legal term that encompasses many forms of payments. The regular rate of pay is often higher than the employee’s normal hourly rate, because the regular rate includes other forms of compensation an employee may receive, such as bonuses, commissions, piece rates and the value of most employer-provided meals and lodging.
Once all the additional forms of compensation are added to the normal hourly rate to arrive at an employee’s regular rate of pay, that amount is then used to calculate overtime pay as well as sick leave pay under California’s mandatory sick leave law.
The value of gift cards given to employees at the holidays generally does not need to be taken into consideration when calculating the regular rate of pay.
Limitations on Exclusions
However, there are certain important limitations on when the value of such gift cards can be excluded. These limitations come from federal regulations (Title 29, Code of Federal Regulations, Section 778.212) and are followed by the California Labor Commissioner as well.
• First, the federal regulations require that it be “a gift or in the nature of a gift.” The regulations go on to say that if the amount “is so substantial that it can be assumed that employees consider it a part of the wages for which they work,” then it won’t be considered a gift.
Therefore, an annual holiday gift card that represents a substantial part of the employee’s earnings might need to be included the regular rate of pay.
• Second, the regulations say the amount of the gift card must not be “measured by or dependent on hours worked, production, or efficiency.” Basing the amount of the gift card on a formula related to the number of hours an employee worked throughout the year, or the number of pieces they produced per week, could mean the value of the gift card would need to be included in the regular rate of pay.
• Finally, the gift card must not be given based on a contract that gives the employee a legal right to it. For example, if a commission agreement includes a right to a valuable gift card for hitting certain sales goals, the value of the gift card would likely have to be included the regular rate of pay.
Column based on questions asked by callers on the Labor Law Helpline, a service to California Chamber of Commerce preferred and executive members. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.