Compliance Alert: Bonuses

Compliance Alert: Bonuses

by | May 3, 2022

USERRA Compliance Alert:

Is the returning servicemember entitled to bonuses?

A recurring issue raised by returning servicemembers and their employers is whether a returning servicemember is entitled to a bonus missed because of the employee’s military service. The answer is, “it depends.”

Initial Considerations

As many employers know, USERRA is considered “the floor,” and an employer is always entitled, indeed encouraged, to go above the minimum requirements of USERRA. For instance, many employers who have been nominated for the Secretary of Defense’s Freedom Award give some measure of pay to an employee while on military service even though it is not required under USERRA. Therefore, an employer may choose to award such bonuses as acknowledgement of the service and sacrifice of the servicemember employees.

Another consideration that may require the payment of bonuses under USERRA for periods the employee is on uniformed service is when the employer has a leave of absence policy granting such bonuses to other non-military employees on a comparable leave of absence. We have discussed previously the fact that servicemembers are entitled to the “most favorable leave of absence” policy offered by the employer for a comparable leave of absence.

Is the bonus a “seniority” or “non-seniority” benefit?

The determination of whether the employer owes a returning servicemember a bonus for the period the employee was on uniformed service depends upon how the bonus is structured—is it a “seniority-based” benefit or a “non-seniority based” benefit? A bonus is “seniority-based if it accrues with or is determined by seniority and depends primarily on whether the benefit is a reward for length of service. If a bonus is based on seniority, it must be included in the escalator position and provided upon reemployment.” Such bonuses are typically awarded to all employees based upon the number of years employed and does not depend upon hours worked or other performance prior to or after being awarded by employer.

By far most bonuses are considered a “non-seniority” based benefit, and therefore a form of compensation under USERRA. Thus, an employee, or the company overall, must reach some performance goal in order to participate in the bonus pool. In this regard, the non-seniority bonus is considered a form of compensation to the employee for contributing to the performance of the company during the bonus period. In those circumstances, the returning servicemember is not entitled to that portion of the bonus attributable to the period the employee was on uniformed service.

One qualification, however, is that “If a bonus is non-seniority-based and is provided to similarly situated employees on comparable non-military leave, it must be provided to employees on military leave.”

An employee must not be disqualified from receiving a bonus because of uniformed service.

Often the employee’s military leave of absence will not perfectly coincide with the bonus period established by the employer. For example, a servicemember is absent for uniformed service a total of six months during the calendar year, which is the employer’s bonus period. In order to participate, the employer requires an employee to work a certain number of hours, which the servicemember fails to meet because of the military absence. Under USERRA, the employer must determine whether the servicemember would have qualified for the bonus had he worked the entire year. If so, then the servicemember may not be precluded from participating in the bonus. However, the bonus will be pro-rated for the period the employee actually worked—which would be six months in this hypothetical.

Don’t Forget! Bonuses and Pension Issues

Finally, servicemembers and their employers should be aware of the employee’s pension rights upon return from uniformed service. Under USERRA, if the employer has a defined contribution pension plan, which includes most 401(k) plans, the employee has three times the length of uniformed service, up to five years, to make up contributions to trigger the employer’s contribution obligations. (Note that failure to make those contributions within those deadlines will result in loss of this right to make up those pension rights lost during uniformed service.)

The returning servicemember’s rights to makeup contributions to a defined contribution plan depends upon the details of the 401(k) and the limits established by the IRS for the contributions. Nevertheless, USERRA is intended to put servicemembers in the position they would have been had they remained continuously employed. Therefore, in calculating the compensation upon which the contributions are based consider any bonuses not received if the employer’s plan allows some or all of these bonuses to be contributed to the plan. The servicemember should consult a financial adviser as to whether this is an option, and the extent to which the servicemember should contribute. However, the bonus missed because of the employee’s uniformed service should be considered if the plan allows it to be contributed to the pension plan.

Conversely, if the employee is part of a defined benefit pension plan, the pension rights are typically calculated by the employer upon the employee’s return from uniformed service. USERRA requires the corresponding contribution by the employer to be made within 90 days of the employee’s return, or when normally made, whichever is later. Those employer contributions are based upon what the employee would have been reasonably certain to have earned had she remained continuously employed. If that would have included any bonuses, even if the employee was not entitled to it because she was on uniformed service, the amount of the bonus must be included in the calculation.

Conclusion

Servicemembers returning to their civilian employer should be aware of the issues regarding their potential bonus compensation. They may be entitled to a bonus missed during their leave of absence, a portion of that bonus, or even use that bonus as “compensation” to determine how pension rights are restored following uniformed service. Consult with your financial adviser or a representative of the Employer Support of the Guard and Reserve to learn more.

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    Mathew M. Meyer, Esq., Cornell Law ’95, is a business law, regulation, and commercial litigation attorney in the Twin Cities area. A Marine Veteran, Mr. Meyer is a long-time volunteer and mediator with the Department of Defense ESGR program.  He is the Minnesota ESGR Ombudsman Director and Military Liaison to local Marine and Navy Reserve units, and frequently advises servicemembers and employers regarding USERRA legal issues. All opinions, comments, and analysis are his alone, and do not reflect those of the Department of Defense ESGR program, or any other organization.

    The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement.

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