Giving employees raises and bonuses can be complicated. As we previously discussed, misclassifying a bonus can result in an accounting nightmare. And one well-intentioned employer misstep, such as promising an employee payment of a bonus, can quickly reclassify a discretionary bonus as a non-discretionary bonus that must be accounted for in a non-exempt employee’s regular rate. When workers unionize, an additional wrinkle is added to the complex landscape of bonuses and raises – whether or not an employer must continue to give raises and bonuses to its employees after they unionize.

Last week, the D.C. Circuit Court of Appeals issued an opinion that provides some clarity on this issue. Specifically, the court reversed part of a National Labor Relations Board (NLRB) order that a medical transport company bring back sporadic gift-giving and bonuses that were stopped when its workers unionized.

The rule under the National Labor Relations Act is twofold:

(1) Employers may not withhold or stop giving bonuses or raises to undermine union organizing efforts or retaliate against union activity, and

(2) Employers may not dole out bonuses or raises to unionized employees without first negotiating their terms with the union, unless it already does so regularly

As the court opined, employers are often caught in a Catch-22 where it is potentially seen as improper if they do give out bonus payments and improper if they don’t. Recognizing this dilemma as background, the court overturned the NLRB’s conclusion that an employer’s suspension of gift and discretionary raises was unlawful because it was not supported by substantial evidence.

The facts are as follows: A family-owned medical transport company had around 55 employees and had never adopted a formalized, written wage policy. The company told new hires that they could expect periodic pay raises on their work anniversaries, but those promises were rarely fulfilled. Instead, the pay increases occurred at irregular intervals, ranging from two weeks to over 22 months, and the amount of the pay increases varied from 25 cents to $2.50 per hour. There was no clear connection between the amount and timing of the pay raises and any other predictable metric such as seniority or performance.

Similar to the pay raises, the medical transport company did not have a formalized bonus policy or standardized gift practice. The company held an annual Christmas potluck where the owners gave out gifts and prizes from their personal funds and on one occasion donated $10,000 to an employee whose home was devastated by a mudslide. The owners did not keep a record of the gifts or claim the gifts as a tax deduction. The employees also never claimed the gifts as wages and did not report them on their income taxes. Once the union was elected, the company stopped giving pay raises and holiday gifts, stating that the pay raises and gifts were discretionary and that the company now had to negotiate any pay raises with the union.

The court’s decision turned on whether or not the holiday gifts and pay raises were a “longstanding practice of automatically paying predictable amounts at known intervals.” Based on the unpredictability of the payment amounts and timing, and a lack of nexus to a predictable metric, the court held that the company did not have an obligation to continue pay raises after the workers unionized. Similarly, the Christmas gifts were not regularly given and were not tied to an employee’s remuneration so there was no obligation to continue giving Christmas gifts each year after the workers unionized.

To prevent getting in a similar debacle, employers should consider having a formalized wage policy and carefully classify each payment of any bonuses or gifts given to employees. And, as always, employers should consult with counsel throughout the unionization process, especially before they stop or start giving out raises and bonuses.