You’ve put together a great reward program for your top performers, and it works across multiple states. The bonuses all follow the same structure, and you use the same vendor for the gift cards.
When you want to give employees rewards in different states, you have to work through dozens of labor laws that control just about every part of how you do it – from when the payments have to go out to how long the gift cards can stay valid. A basic $100 recognition gift card needs very different paperwork in Maryland versus in Montana. Your commission structure may need to be calculated weekly in one state, while another state lets you average it out quarterly. Even the way that you store and manage reward program data comes with privacy laws that are wildly different between somewhere like Virginia and Colorado.
Here’s how these state labor laws actually affect the way that you build and run your reward plans.
Let’s see how your state’s laws could shape your employee rewards strategy!
How Wage Laws Affect Your Commission Plans
State minimum wage laws usually completely change the way employers handle commission structures and employee rewards. California has developed one of the strictest approaches in the country, and employers there have to reconcile minimum wage requirements with each and every paycheck they issue. But other states are much more flexible and will actually let employers average wages out over an entire quarter. Just the difference in how operations are handled can determine if a commission plan succeeds or fails completely.
The Armenta v. Osmose case created a big change in how California employers have to handle wages and commissions. Employers now have to track and pay for all hours worked as separate line items and include time when employees aren’t actively selling or making anything at all.
An example shows how wildly different these regulations are from one state to another. An employer who wants to pay an employee a $500 monthly commission has a pretty simple process in Texas for counting that money toward the minimum wage requirements. California employers aren’t nearly as fortunate, though – they have to structure the base wage carefully to make sure each and every pay period meets the legal threshold on its own. The math gets complicated fast, and even small calculation errors can trigger big penalties later on.
These problems have pushed plenty of employers to completely ditch commission structures in some states. A lot of them now use straight bonus systems instead since the compliance requirements are far easier to manage and track. The trade-off is that bonuses don’t always light the same fire under salespeople that commissions traditionally do.
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Draws against commissions create yet another layer of complications that employers need to work through carefully. Some states treat these advances as loans that employees have to eventually repay to the company. Other states view them as wages that have been earned, and so they can’t be clawed back under any circumstances. Employers need to know which set of regulations applies in each location where their employees work.
What functions just fine in one state might actually violate the labor laws in another state. Reward structures have to be flexible enough to adapt to local laws and regulations, and this usually means creating very different compensation plans for employees in different locations.
The Complex Laws Behind Gift Cards
Gift cards should be the perfect employee reward option – businesses can buy them in bulk ahead of time and hand them out whenever an employee does exceptional work. The whole process was supposed to be simple and efficient for HR departments everywhere. State laws have turned what was once a simple gesture of appreciation into a real compliance challenge, as these requirements just get more complicated every year.
California’s gift card laws are where the situation gets pretty messy for businesses. Any gift card worth more than $5 in California has to stay valid forever – the state won’t let you put an expiration date on it, period. For your company, this turns into a massive headache because you have to track each card indefinitely. The accounting team ends up buried in records from cards that were sold years and years ago, and that’s the last item anyone in accounting wants to manage.
Delaware approaches the whole situation from a very different angle. After just three years, their unclaimed property laws let the state take possession of any unused gift card balances. A reward card that you gave to an employee who never got around to spending it suddenly turns into the property of the state government. Businesses have to meticulously track which employees received the cards and when they got them just to stay in compliance with these requirements.
New Jersey went ahead and changed their gift card requirements back in 2019 to address the way businesses were handling dormancy fees. Montana handles it a bit differently – the state doesn’t have sales tax, but it makes businesses put very particular disclosures on each card they sell. Every state has created its own version of the requirements, and you’d be hard-pressed to find two states that do it the same way. For businesses with employees spread across multiple states, this turns into an absolute logistical mess. A basic $25 Starbucks card needs very different documentation and tracking procedures based on which state the recipient calls home. I’ve seen a few employers throw in the towel completely and switch to cash rewards just to skip the headache.
The compliance requirements become even more burdensome once you factor in escheatment timelines. All states have their own schedules for when they can claim unused balances, so your reward program might need completely separate tracking and reporting processes for each state where you have employees.
When You Must Pay Your Bonuses
Payment timing for employee rewards is one area where the laws are very different depending on which state you’re in. A bonus payment strategy that works just fine in Texas could actually get you into serious legal problems in California.
California treats earned bonuses as wages under Labor Code Section 204, which creates genuine complications for payroll management. Your accounting team might want to batch all the bonus payments together at quarter-end for efficiency. But California law doesn’t allow that type of delay. The state views these bonuses as compensation that employees have already earned through their work, so you have to pay them out within the same timeframe as normal wages.
The distinction between discretionary and non-discretionary bonuses brings another layer of difficulty to all this. The Schachter v. Citigroup case spelled out the difference between these two categories. Promising a bonus based on hitting certain performance metrics turns it into a non-discretionary bonus, and you’re legally obligated to pay it on time under the state law. But deciding to hand out bonuses just because you want to reward your team gives you a lot more flexibility in terms of when those payments actually happen.
Year-end planning is where this gets to be a headache for a lot of businesses. Plenty of organizations would love to push their annual bonuses into January for tax purposes, and lots of employees actually like it that way because it helps them stay out of a higher tax bracket for this year. The problem is that a few states have wage payment laws that make this illegal. When the bonus was earned in December, you have to pay it in December – tax implications be damned.
Massachusetts has some of the strictest requirements around this for employees who are leaving the company. When an employee quits or gets terminated, any bonuses they’ve earned need to be paid out on that exact same day. Not the next payroll cycle (not within two weeks), we’re talking about same-day payment requirements. For businesses that aren’t prepared for this, it can create serious cash flow problems when the bonus amount is large or multiple employees leave around the same time.
How States Tax Your Non-Cash Rewards
State tax requirements for employee rewards are a mess, and the headache only gets worse once you look into the specifics. Federal law at least gives you pretty simple guidelines that apply everywhere. But every state has developed its own interpretation of what qualifies as taxable income and how employers should handle it.
In practice, you have to track every gift card and reward that you give out during the entire year, and then you have to reconcile those numbers 4 separate times instead of just once at year-end. Pennsylvania throws in an extra layer of confusion with its local taxes on prizes and awards. Most employers have no idea that these local requirements even exist, and they only find out about them when an unexpected letter shows up in the mail.
Non-cash rewards cause the worst problems by far. Oregon created quite a stir back in 2018 when it decided that experience rewards like company-paid trips needed a very different tax treatment than other types of rewards. A team dinner that you put together specifically to help with morale could create tax obligations in California, while the exact same dinner in Texas wouldn’t trigger anything at all. Those concert tickets you bought for your top performers need very different paperwork in different states for the same exact reward.
California has one of the strictest ways of handling this whole issue. The state expects employers to report the income on any reward that carries a cash value. Even the smallest benefits can count toward taxable compensation. Other states are much more lenient and allow you to skip all the paperwork for small benefits as long as they fall under specific dollar amounts. Of course, every state sets very different thresholds for what qualifies as de minimis.
More businesses are now choosing to simplify this tax issue. They gross up all rewards to cover any taxes that might apply, no matter where each employee works. It does make everything easier for the HR and payroll teams, who no longer have to track different tax rates by location. The problem is that it costs quite a bit more money when it’s all said and done. These businesses wind up paying extra taxes in states where they never actually needed to pay them!
Privacy Rules for Your Employee Rewards
Privacy laws are now a headache for employers who want to run employee reward programs, and the mess gets worse every year. A few years back, these programs were simple to manage. Now the legal requirements change so dramatically from state to state that compliance has become a genuine challenge for even the most experienced HR departments.
California set everything in motion with the CPRA, and the implications for employers are significant. The law forces businesses to get explicit consent before they can collect any performance data that feeds into reward decisions. Those traditional protections that employers used to count on for this type of data collection went out the window once reward programs entered the equation. Employers have to now document which employee data they collect, and they need to justify why each bit of information is necessary for their reward system to work properly.
Virginia decided to create its own set of requirements with the VCDPA, and these are especially annoying for data analytics. The state wants businesses to collect as little data as possible, making it hard to run helpful analytics on reward programs. They can’t simply collect everything that they might need and then decide what’s actually helpful later. The Patel case certainly threw a wrench into everything because the courts ruled that employee performance metrics count as protected personal information. What that means is that even a basic peer nomination system could need a full privacy assessment across multiple states.
Colorado has its own requirements for data retention policies for reward programs. Businesses can’t simply leave historical reward data sitting around indefinitely anymore – they need to have legitimate business reasons for every bit of the data they store. Illinois made the situation even more complicated with BIPA, and if a company uses a fingerprint scanner or facial recognition technology to track productivity for their rewards, they’ve wandered into biometric law territory as well.
The basic conflict is obvious – businesses want to track engagement metrics and measure if their reward programs are actually driving results. But employees have data privacy rights that need to be respected. This balancing act gets harder every time another state passes new privacy legislation.
I’ve seen plenty of businesses throw in the towel on their attempts to comply with different requirements in every state. What they do instead is find whichever state has the strictest requirements and then apply those across their entire organization. This might not be the most efficient approach, but it beats the alternative of tracking 50 different strategies.
Level Up Your Incentives and Rewards
When you’re trying to figure out which approach makes the most sense for your company, the smartest strategy tends to be looking at the requirements in the states that have the strictest laws. You can work your way backward and see where you have a bit more room to maneuver in states with looser regulations. A lot of businesses discover that it actually makes solid business sense to develop different tiers for their programs – everyone receives the core compliant version that works everywhere, and then employees in specific states can access the extra features that those particular states allow. Whichever path you take, it’s very important to document your reasoning for each choice.
State labor laws are always changing as well, and a program that’s completely compliant right now might need some adjustments 12 months from now. This compliance work creates layers of complications to the reward programs that weren’t there a decade ago.
When it comes to those specialists – at Level 6 (yes, that’s us!) we’ve built our entire business around helping yours grow through thoughtfully designed incentive programs. We work with sales teams who need that extra push to hit their targets, HR departments who want their employees to feel really valued and everyone in between. Our toolkit includes everything from branded debit cards to complete employee recognition programs to sales incentive systems that we design specifically for your industry and goals. Every program we create is custom-built to bring you the results that you actually need.
Drop us a line for a free demo, and we’ll show you how we help successful businesses get the most from their investment and improve their sales performance!
Claudine is the Chief Relationship Officer at Level 6. She holds a master’s degree in industrial/organizational psychology. Her experience includes working as a certified conflict mediator for the United States Postal Service, a human performance analyst for Accenture, an Academic Dean, and a College Director. She is currently an adjunct Professor of Psychology at Southern New Hampshire University. With over 20 years of experience, she joined Level 6 to guide clients seeking effective ways to change behavior and, ultimately, their bottom line.
