Many employers reward hourly employees by paying non-discretionary bonuses. Such generosity; however, can lead to significant liability issues under the Fair Labor Standards Act (FLSA). Under certain circumstances, bonuses must be considered part of the employee’s earnings for purposes of calculating overtime under the FLSA.
Bonuses are frequently provided to encourage and reward employees for their productivity or quality of work. In other cases, the Company may simply want to share profits after a successful year to thank employees for their hard work. There are two types of bonuses - discretionary and nondiscretionary. A discretionary bonus consists of payments that are made within the sole discretion of the employer and are not expected or guaranteed. Discretionary bonuses do not have to be included in determining the employee’s total earnings to calculate overtime. A nondiscretionary bonus, on the other hand, would include payments that are either promised or expected. For example, a nondiscretionary bonus may be payable based on the employee’s quantity or efficiency of production or even attendance.
The FLSA requires that nondiscretionary bonuses must be added to other wages and compensation received by nonexempt employees in determining their “regular rate” of pay for purposes of calculating overtime. Bonuses that are earned over more than one work week must be allocated to pay periods to which the bonus applies and the regular rate must be recalculated.
The Department of Labor has provided guidance for calculating overtime in a case where an employee receives a retention bonus. If the employee receives a $2,000 retention bonus after six months of employment, the bonus would need to be applied over a period of six months (26 weeks), equal to $76.92 ($2,000 divided by 26 weeks). If the employee worked 10 hours of overtime during the ninth week of employment, the employee would be due an additional $7.70 in overtime based on the following calculation:
$76.92 ÷ 50 hours = $1.54 (increase in the regular rate)
$1.54 x ½ = .77¢ (increase in the additional half-time premium)
.77¢ x 10 hours of overtime worked = $7.70 (increase in overtime earnings due to the retention bonus).
Such calculations are very tedious and can be a nightmare for payroll personnel. By overlooking the recalculation of overtime, employers can accrue significant liability including attorney’s fees, interest and fines.
Employers considering bonus programs for hourly employees should consult with legal counsel and review the regulations to make sure they are not creating problems under the FLSA. For those employers who do not want to go back and recalculate overtime, there may be a way to avoid the payroll nightmare. The recalculation is not required if the bonus is paid based on a percentage of the nonexempt employee’s total straight-time and overtime earnings over the bonus period. 29 C.F.R. § 778.210. Under this method, the bonus is described as a percentage of the nonexempt employee’s total (W-2) earnings, thereby including both regular and overtime payments and obviating the need to recalculate the regular rate.