One morning around a dozen years ago, I walked into the bullpen of the magazine at which I worked, and sitting in my boss’s chair was a cheap, inflatable sex doll, one of those latex ladies in a garter and panties with a startled, round-mouth expression. We all knew who put it there: the office stinker, a truly hilarious and much-loved senior person. He was one of the few who dared to joke with my boss—a notoriously talented but formidable woman who could reduce junior editors to tears—let alone in such a blatantly inappropriate way. What was particularly funny about this was that she’d recently cut her hair, and the doll’s stylized, Betty Boop bob made her and the doll look like twins.Everyone sat there, tittering nervously, waiting for her to walk in and splash her double nonfat latté all over her Prada pencil skirt and pointy pumps. My office was in the back, but I loitered nearby—there was no way I was going to miss this. The tension was thick as Jell-o. The culprit sat coolly at his desk near hers, typing away as if nothing was amiss.

When she finally came in and saw the doll, her expression was priceless: Her mouth formed a perfect “O,” just like the doll. Her eyes widened in shock, then narrowed with outrage as she scanned the sea of desks for who could have pulled such a stunt. She quickly settled on the guy who did it and marched to his desk. He raised his head in mock innocence. I don’t remember exactly what he said—something about how she had so much work he thought she could use a clone. Whatever it was, his timing was impeccable. There was a tense beat, and then her face relaxed into mirth and she swatted him with her $1,200 handbag. The entire office exhaled, laughing right along with her.

That story perfectly illustrates many of the reasons why humor in business is invaluable, even if no one has the chutzpah to prank the boss, and even if your workplace culture discourages any use of merchandise from the Frisky Fantasy Depot. For the record, that gag wasn’t quite as risky as it might seem on the surface: The magazine we worked at didn’t shy from sexual topics. The subject matter had a self-selecting effect on the staff—you didn’t work there if you were not comfortable at least hearing others discuss sex. Riskier than the sexual nature of the doll was that the joke was being played on the big, scary kahuna, and that the doll’s painted-on hair looked uncannily like her new ’do. No one knew quite what to expect.

But the gamble paid off big. The joke delivered on all the benefits that intentional humor in the workplace has been found in the research and management literature to confer: It bonded the staff together, momentarily leveled the hierarchy and broke the tension in a stressful, deadline-driven environment. It also humanized our intimidating boss—she revealed herself to be someone who could laugh at herself—and the joke might even have made her feel part of the group in a positive way, as research into workplace humor shows that good-natured ribbing often takes place within an in-group as a way of showing that a person belongs. For the guy who pulled it off, it further enhanced his reputation as a fun, funny manager, which a study from the University of Miami School of Business shows can be ingratiatory—i.e., helpful in getting people to do what you want, essentially because they like you and want to be around you more.

The prank and the shared laughter may even have made our hardworking crew even more so; while it’s difficult to measure humor’s effect on productivity, it has long been known that absenteeism and turnover are lower, and engagement is higher when workers have a “positive affect,” academic-speak for a good mood. A study soon to appear in the journal Human Relations has found that levity not only boosts the jokers’ moods, but is contagious—humor makes the entire group feel good, not just those engaged directly in the joke. Christopher Robert, associate professor of management at the Trulaske College of Business at the University of Missouri in Columbia, also found that the positive vibe lasts well after the sex doll has been deflated and stashed in a desk drawer. “We found that when people experience humor one day, they’re more likely to have a positive affect tomorrow, and be more engaged tomorrow afternoon,” he says. I’ve had jobs where I’ve watched the clock, but at that magazine job, time flew and we all stayed late.

Of course, all of the above only holds true if everyone thinks something is a real knee-slapper. This prank could have gone down very differently. Had our boss arrived in a foul mood or with something ultra-serious on her mind, or if the jokester had overestimated his status as favorite son, there could have been hell to pay for him and for us, too. Likewise, if he had misread the culture in our office—imagine such a stunt in a corporate law office, for instance—any number of people could have filed a harassment complaint. And then there’s the Michael Scott Syndrome. Steve Carell’s character on The Office thinks of himself as the quintessential “fun” boss, but he’s only inadvertently funny—he’s heavy-handed and consistently feels he has license to make jokes about ethnic and social groups to which he doesn’t belong. His crew is often bonded together, but only in defense against his torment.

Most offices, of course, strive for a more sober environment, but even though managers are wisely inclined to have explicit guidelines governing what could be construed as inappropriate humor, there’s loads of room to incorporate more laughter in the workplace. Managers who think goofing around is the same as goofing off are missing the point. No, you don’t want to run a gigantic playpen, but “people have wasted time at work for hundreds of years,” says Robert. “Humor is a good way of quote-unquote wasting time. You’re doing things like building positive affect, developing relationships and bringing up troubling or contentious issues in a way that isn’t so threatening to supervisors. Humor breaks are more positive than other solitary ways people might take breaks.”

In addition to making the place where people spend a third or more of their lives a fun place to be, humor—casual banter, emailed messages and actual joke-telling—builds relationships and helps people work together more creatively by allowing colleagues to get to know one another. “Humor is a way of disclosing things about who you are that you don’t technically have to disclose at work,” says Cecily Cooper, an associate professor at the University of Miami School of Business. “You can just do your work but if someone discloses something to me with humor, I will express humor back to her. Little things come to the surface.” Let’s say I crack a joke about my pants no longer buttoning… no, it has nothing to do with work, but if my cube mate finds it funny, she likes me more. Even better, she’ll feel open to sharing her shopping-while-fat joke, and we will find we have loads in common. And if I get a reputation as cool to be around, people companywide will be swarming my cubicle wanting to involve me in projects, despite the fact that my pants don’t close.

Over time, this reciprocity can build a sense of trust, says Libby Lowe, senior manager at Engaged Health Solutions, a 25-person healthcare consultancy with offices in Chicago and Los Angeles. EHS has a few funny office traditions, including a blog on which staffers can post things they think their peers would crack up over—it keeps all those dancing kitty videos from clogging up their in-boxes. “We all work really hard and there are times when it’s crazy and stressful, but we feel like we have a history together,” Lowe says. “We’re not sitting around laughing all day, but we have friendship and a backlog of trust.”

Humor transmitted by technology can be especially helpful in helping build teams among people who work remotely, as they do at Accessibility Partners, a District of Columbia-based consulting firm that helps companies make computer hardware and software accessible to people with disabilities. “We do a lot of joking over IM [instant messaging],” says Dana Marlowe, principal partner there. Yankees fan Marlowe says there’s reciprocal ribbing between her and a Kansas City Royals loyalist in Nebraska, and one of her co-workers, who is blind, sent out an email saying he was thinking about getting an iPad, and wondering which color he should get, which generated mucho LOLs. Dana, who is not disabled, says she probably would not have initiated such a joke, but the fact that the co-worker did is a sign that they work in an environment where people feel they can be themselves.

But being yourself doesn’t mean anything goes, of course. Picking on a person who hasn’t demonstrated she can not only take it but enjoys it can backfire. A very funny friend told me that when she was 21, she worked at her first job at a small benefits company. One day at lunch, she and a female co-worker went out and bought a copy of Playgirl. “We had just hired this quiet Chinese girl, and we thought it would give her a chuckle if we cut out the naked guy and put it over the picture in the frame on her desk,” she says, still mortified in the retelling years later. She and her friend didn’t realize that the photo already in the frame was the Buddha. “We meant completely no disrespect, but in our ignorance we didn’t know who the Buddha was! I would have known better than to put it over a picture of Jesus!” The woman burst into tears and my friend followed her outside, apologizing and begging forgiveness. “It was totally to make her laugh, but it made her cry! She forgave me, but I felt so horrible.”

There are more subtle differences than the above in the type of humor that flies in various offices—sarcasm, for instance, works in some settings but is offensive in others. Workplaces, like individuals, have a personality, and the only way to know what will be funny (and not send people sobbing into the street) is to pay attention to that personality and respect it.

Who is initiating the humor, whether it’s a joke or a passing comment—the boss or someone lower down on the food chain—and who he is speaking with also matters, of course. For obvious reasons, a receptionist is likely going to pee in her pants laughing over the CEO’s joke, whether or not it is funny, and be less inclined to initiate a joke with a higher-up. Among the other receptionists, however, the humor might be very different—perhaps snarky jokes about management’s ineptitude—but considered perfectly appropriate or even bonding in context. In-group status can also be important: Someone who is disabled, for instance, can make a joke about disability much more easily than someone who is not. The type of business factors into what kind of humor works—morticians and doctors, for instance, are sometimes morbidly funny behind the scenes because they are dealing with such heavy issues and can’t kid overtly with their customers and patients.

So how does a manager create a climate that is conducive to humor in this complex and litigious society—and make sure work still gets done? Ideally the humor comes from the top down, and there’s much you can do to set the tone for your office that humor is not only permitted but encouraged. (See sidebar, “Eight Ways to Foster a Funny Workplace.”) There are dozens of stories about how Herb Kelleher, former CEO of Southwest Airlines, showed up at corporate functions dressed in drag, as Corp. Max Klinger from M*A*S*H, or as Elvis Presley, transmitting how much he values levity in the work environment. The same happens at smaller entrepreneurial companies such as 1-800-GOT-JUNK, a waste removal firm based in Vancouver. CEO Brian Scudamore instituted “the big blue wave,” in which he leads franchisees and haulers in standing by the side of the road in blue fright wigs, waving at passersby to invite business. M.P. Mueller, president of Door Number 3, a boutique ad firm in Austin, Texas, has an annual Talk Like a Pirate Day and even brought in a petting zoo to an office birthday party. “We have grown like hotcakes and so much of that is the culture. Humor energizes people,” says Mueller, who says the climate she’s helped to create is a tacit green light for the more casual water-cooler humor that connects people and adds to their creativity. “It lets everyone know that their contributions are just as important as everyone else’s. People want to be recognized as individuals, and you’ve gotta foster that.” Sometimes people’s humor crosses a line, she says, but it’s never nasty or targeted.

Some companies have taken top-down humor about as far as it can go and have hired comedians to help the staff crack one another up. Six or so years ago, Steve Cody, co-founder of Peppercom, a New York City public relations firm that handles clients such as Whirlpool and TGI Friday’s, took standup comedy classes and started performing for the hell of it. “I had no concept of linking it to business, but I noticed I was a better listener, better presenter and better able to fill those pregnant pauses with clients,” he says of his practice reading the audience. He first had his senior people enroll in a workshop with comedian Clayton Fletcher and has now trained all 90 of his employees, including in the San Francisco and London offices. The staff didn’t love the concept of getting up to perform a one- to two-minute skit at first, Cody says, “but the group really rallies around itself. It has been a phenomenal team-building experience. You might have sat next to each other for two or three years and never knew someone was afraid of flying. There’s been a huge improvement in morale.” Cody believes the comedy training has helped encourage outside-the-box creative thinking on the work itself. “The end product will have more creativity to it, more edginess than average. With Honeywell and Tyco Flow Control, you don’t want to be funny per se, but you can be creative.”

A humor mandate imposed from the top, however, has its distinct drawbacks: It can be seen by staffers as a waste of time at best, and at worst condescending. In a fascinating eight-month study in the Journal of Applied Behavioral Science, researchers looked at one company’s overt attempt to incorporate humor in the workplace. The company was a call center that the researchers dubbed Sunray. To break up the boring work and keep customer service reps inspired and friendly, Sunray instituted programs such as a mini Olympics, at the end of which relay racers pounded beer; days where the staff took off work and staged a musical; and other company-sanctioned opportunities to weave official fun into the workplace. At Christmastime, the CEO dressed as a “crazy” Santa and distributed chocolates to the staff.

While some were attracted to the Sunray culture, the study found that half of the staff viewed the attempts cynically. “As far as these workers were concerned,” the authors wrote, “there is something inexplicably unreal about the silliness, merrymaking and zaniness orchestrated by management.” Some workers felt they were being compelled to laugh, not doing it out of their own spontaneous volition, which made it not only unfunny, but irritating. What’s more, because the company was not a family, as it was trying so hard to be, the attempt felt disingenuous, alienating and patronizing. Of course, had the attempts at humor been truly funny, even the most cynical employee might have reaped the work-enjoyment benefits that management was hoping they would.

And that’s the key: Humor at work has to be, well, humorous, not just to you (a la Michael Scott), but to the people you work with. “It can be very hard at the top to know whether your subordinates are enjoying your humor,” says Cooper. “When you’re a manager, you’re isolated.” Cody of Peppercom says if you pay attention, you can tell. “The people around you, they will either give you that positive laugh or a chuckle, or you’ll be greeted with deathly silence,” he says. (Then again, he’s the boss. If in doubt, Cooper advises asking a peer whether she found what you said funny.)

Ideally, you as the boss would foster an atmosphere in which humor can grow organically and arise spontaneously, trickling down from you but not imposed by you, says Professor Robert.

Alex Schmelkin, co-founder of Alexander Interactive, a website design firm in New York City with clients that include Pepperidge Farm and Virgin Mobile, says some of the funniest things just happen. “We were working on a project for one of the really big pet food companies online, and it was around the time we were starting to organize a weekly happy hour,” he recalls. One designer was working the page for the rodent food, and for a joke, animated the hamster doing some goofy hip-hop moves. “From then on, every Thursday at five became Hamster Time,” essentially a company-sponsored steam-release happy hour for the group. “It was client-related, but we were not making fun of the client so much as MC Hammer.” And if you can’t make fun of MC Hammer, really, why go to work?

“People who work here are more willing to take risks,” says Schmelkin. “They want to stay here and produce better work for our clients.” No matter what your business, if you don’t see that as the end goal, the joke is on you.