How non-discretionary bonus payments paid to non-exempt employees effect their overtime calculations

By SCOTT CRUZ

The Fair Labor Standards Act (“FLSA”) requires employers to pay non-exempt employees at least the federal minimum wage for all hours worked.

When a non-exempt employee works over 40 hours in a single workweek, the FLSA requires employers to pay overtime at a rate of one and one-half times that employee’s regular rate of pay.

What happens when non-exempt employees earn a bonus on top of their regular rate of pay during a workweek in which they work over 40 hours?

The answer depends on the type of bonus paid.

Discretionary bonuses payments can be excluded from the regular rate, while non-discretionary bonuses cannot.

More specifically, the FLSA requires that non-discretionary bonus payments be factored into calculating the non-exempt employee’s regular pay rate as, ultimately, that calculation is needed to determine the correct amount of overtime owed for any particular workweek the bonus covers in which a non-exempt employee worked overtime.

Generally, bonuses are considered “discretionary” if the employee has no expectation of payment, the employer retains freedom to decide the amount and timing of payment, and the bonus is not tied to meeting specific goals.

Under the FLSA, a bonus will be considered “discretionary” only if all the following statutory requirements are met:

• The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; and
• The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
• The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.

Examples of common discretionary bonuses include, but are not limited to, the following:

• Bonuses for overcoming a challenging or stressful situation;
• Bonuses to employees who made unique or extraordinary efforts not awarded according to pre-established criteria;
• Employee-of-the-month bonuses;
• Severance bonuses; and
• Referral bonuses to employees not primarily engaged in recruiting activities (subject to additional criteria).
• Sums paid as gifts and payments in the nature of gifts made on holidays or on other special occasions as a reward for service provided the amounts of the gifts (or payments) are not measured by or dependent on hours worked, production, or efficiency.

The label assigned to the bonus, as well as the reason for the bonus, are not dispositive as to whether the bonus is discretionary.  That determination is made on a case-by-case basis, depending on the specific circumstances.

An example: On December 21, unbeknownst to employees, an employer decides to award a holiday bonus to all employees in the amount of $100, with no conditions attached to receipt of that holiday bonus. The bonus is issued to every employee with their last paycheck that month. That bonus likely meets the definition of a “gift” under the FLSA, and does not need to be factored into a non-exempt employee’s regular rate of pay and, therefore, will not impact any overtime payments the employee received throughout that calendar year.

A non-discretionary bonus is a bonus that does not meet the above statutory requirements of a discretionary bonus. Rather, bonuses are non-discretionary generally because the employees know about the bonus in advance, know the amount of the bonus and expect to be paid that bonus if they meet the specific conditions set by their employer for receipt of the bonus.

In other words, if the bonus is announced to employees in advance and functions as a “carrot” to incentivize them, then it likely is a non-discretionary bonus. Importantly, the FLSA makes clear that the fact that the employer has the option not to pay the promised bonus, does not automatically make the bonus discretionary.

Examples of non-discretionary bonuses that must be included in the regular rate include:

• Bonuses based on a predetermined formula, such as individual or group production bonuses;
• Bonuses for quality and accuracy of work;
• Bonuses announced to employees to induce them to work more efficiently;
• Attendance bonuses; and
• Safety bonuses (i.e., number of days without safety incidents).

If the bonus is non-discretionary, the FLSA requires that it be factored into the non-exempt employee’s regular pay rate when calculating the correct amount of overtime owed to an employee who has worked overtime in the workweek and/or time period the non-discretionary bonus covers. So, how exactly is this done?

Assume Brittney makes $15 per hour and was promised in advance and received a $100 non-discretionary bonus for not being absent or tardy during the prior week. She worked 45 hours during that week. Below is how you calculate her overtime in that week based on her receiving the $100 non-discretionary bonus:

• Multiply her hourly rate by hours worked: $15 x 45 = $675.
• Add straight-time pay to bonus pay: $675 + 100 = $775.
• Divide total compensation by total hours worked to obtain new regular pay rate: $775 ÷ 45 = $17.22 per hour.
• Multiply her regular rate by 0.5 (remember, you’ve al-ready paid straight-time compensation): $17.22 x 0.5 = $8.61.
• Multiply the half-time rate by overtime hours worked to figure out the overtime pay due: $8.61 x 5 = $43.05.
• Her total compensation, including overtime, for that week comes to $818.05 ($775 +$43.05).

In the case of non-discretionary bonuses that apply retroactively to more than just the current pay period, the employer must recalculate the non-exempt employees’ regular rate for every single pay period covered by the bonus and pay employees additional overtime premiums for any overtime hours worked during those pay periods.

If you pay non-discretionary bonuses to your non-exempt employees and have not been factoring that bonus in their regular pay rate for the purpose of paying overtime, you should retain competent employment counsel to discuss the above to avoid potential wage claims.

 

Scott Cruz is a partner in the Labor & Employment Practice Group of UB Greensfelder LLP’s Chicago, O’Fallon, Ill., and St. Louis, Mo., offices. He can be reached at (312) 658-6608 or [email protected].