Types of Pay

Generally, there are two types of pay:

• Regular pay- this is the payroll you're very familiar with, where you're providing regular compensation to your staff for their work on an hourly, weekly, or annual basis. Regular payroll is taxed for income as well as unemployment, social security, and other programs.
• Supplemental pay- this is pay that is above and beyond regular pay which can include: overtime, tips, bonuses or rewards, payments for accumulated or unused time off, severance pay, back pay, or retroactive pay increases. These wages are reported in a separate part of the W-2 that you provide your employees at the end of the year instead of under regular wages. Supplemental pay is taxed at a different rate and most payroll taxes are not included.

You can include supplemental pay with a regular paycheck that you may issue weekly, bi-weekly, or monthly, depending on your payroll cycle, or you can issue it separately. For a bonus, it may be helpful to issue it as a separate paycheck, so it is clearly separate income. If you are offering a temporarily pay increase, you'll want to include it in a weekly paycheck or as a separate retroactive paycheck (which we'll cover later in this document).

Bonuses

Bonuses are additional funds that you give one time, typically for efforts that have gone above and beyond your normal expectations. We are seeing several child care providers issue bonuses in two ways. First, many programs are giving bonuses as a thank you for the additional efforts that were needed through the COVID-19 pandemic and through recovery. Second, some child care businesses are using bonuses to attract or retain staff in a competitive job market. For example, an existing employee could be given a retention bonus if they remain at your child care program for an additional six months. In the case of a new hire, a bonus could look like a bonus after the first 90 days of employment, which also can act as an incentive to accept a position at your child care program.

As with any action you take that affects pay, a bonus should have a formal written communication to your employee, either by letter or email, which includes:

1. Why they are receiving the bonus.
2. The time period it affects.
3. How much the bonus is.
4. When they will receive the funds.

A simple communication to an employee, might be:

Dear _______,

Thank you so much for your additional efforts over the past six months through the COVID-19 pandemic. It has been a difficult time for everyone, and your contributions helped ensure that the children in our care stayed safe and continued to learn.

In gratitude for these efforts, we are going to award you a bonus in the amount of $XXXXX, which will be paid out in your next pay period on MONTH, DAY, YEAR.

Thank you again for your efforts.

Sincerely,

__________________

As you can see, the communication could be very simple and short, but it is important to record the terms.

If you are using a bonus as an incentive for staying at your business, you should also put it in writing at the time you make the commitment. Similarly, you want to include the time period, the amount, how it will be paid out, but also to make sure that it is clearly not guaranteed. In other words, that if there is poor performance or disciplinary issues along the way, the employee will forfeit the bonus.

In this case an example letter you might give to an existing employee or new employee might be:

Dear ________,

Thank you for your commitment to work [or for continuing to work at] our child care center. In our efforts to keep the best staff members, we are offering you the potential to earn a bonus at the end of six months, provided you continue to have satisfactory or better performance and remain employed with our organization during this time. The bonus will be $XXX paid out in your payroll as of the date six months from now on MONTH DAY, YEAR.

We are excited for your continued work and contributions with our childcare center.

All the best,

_______________

Again, in this document, you can see that there are some caveats. You never want to imply that a bonus is guaranteed in any way. Instead, it is always based to some degree on performance and timing. This prevents you from having to pay the bonus to an employee who underperforms or is terminated.

One more thought on bonuses- directors often ask “how much is a typical bonus?” Unfortunately, there is no hard or fast rule.

The data from the Society of Human Resource Managers, the national association for human resource professionals, has research showing typical bonuses are between 5% and 20% of annual salary. They can and do at times go higher and they can be lower as well. Another guide is from the US Small Business Administration related to the Paycheck Protection Program during the pandemic. Their guidance defined a “reasonable” bonus was 10% or less of annual salary. Also, keep in mind there is no guidance on the frequency of bonuses, so theoretically, you can give one bonus a month for retention, or quarterly bonuses to new employees who stay with you.

Temporary Pay Increases

We are starting to see more child care providers use temporary pay increases to compensate employees for the additional efforts during the COVID-19 pandemic, as well as providing increased rates in a labor market that has been particularly competitive. While temporary pay increases could have a powerful impact on ensuring staff morale and retaining staff members, they also need to be implemented carefully.

You want to ensure that in no way are you making a commitment to a permanent pay increase. Once again, make sure there's something in writing that tells the employee clearly what the terms of this agreement are, specifically:

• The amount of the temporary pay increase,
• Why they are receiving it,
• How long it will last, and
• That the increase is, of course, dependent upon continued satisfactory performance.

A letter to an employee might be:

Dear _________,

I'd like to confirm that we are temporarily increasing your salary by X%, as we've discussed, in recognition of your extra efforts through the COVID-19 pandemic and recovery. This moves you from $Y an hour to $Z an hour. This is a temporary pay increase and will start on MONTH DAY, YEAR and end on MONTH DAY, YEAR (with your continued satisfactory performance or better and employment with our organization).

We look forward to being able to compensate you at a higher level during this period to reflect your extra efforts.

Sincerely,

______________

Retroactive and Back Pay

Many times, bonuses and additional temporary pay increases may be ones that we want to apply for time in the past. For example, you receive funding from the state that covers both current costs as well as those from the beginning of the calendar year. This is an action that you need to take typically with your payroll company, but it's important to note there are two different types of historical pay. Back pay is used to correct mistakes that may have been made in the past. For example, maybe you issued a payroll a month ago and then realized you forgot to include your staff members' overtime pay. Retroactive pay is paying somebody for past efforts, whether it's their salary or a bonus, but those past efforts at the time were not ones that you would have committed to pay at that level. So, for example, if you have an employee who is getting paid $15 an hour and you missed three hours of their time last month, well, that will mean $45 of back pay. If instead you had an employee who was making $15 an hour and you want to make them eligible for a temporary pay increase of $2 an hour, that goes back the previous month, that would mean an additional $2 an hour of retroactive pay for that entire month.

Final Thoughts

It's important to make sure that all of these transactions are well documented in a letter with a copy provided both for yourself and for your employee. If the terms change for any reason, especially around temporary pay increase, make sure you write a new letter. For example, if you get some additional grant money and you want to extend your temporary pay increase another three months, you will want to note that in writing in a second letter stating the new terms and amending the information from the original letter. It can be a bit tedious and does increase your paperwork, but this is an important protection legally that helps you prepare in case there is any question in the future about whether the payment was one-time, temporary or a permanent change to their level.

Hopefully, this tool has helped you understand some of the practices that you can use to provide incentives and additional compensation to your staff that rewards their efforts during the pandemic and the current recovery. Some of these can be easier to apply than others, and we welcome you to meet with a Texas child care business coach to discuss specific challenges related to implementing these policies. This coaching is absolutely free and open to any licensed child care provider in the State of Texas. You can register for coaching at childcare.texas.gov or by completing the registration form here.

Disclaimer

The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited. Only noncommercial uses of this work are permitted.

Copyright © 2023 Civitas Strategies, LLC

Questions?

If you have any questions, you can reach out to the Texas Workforce Commission Child Care Coaching Team at Coaching@ECEBizCoach.org.