The federal Fair Labor Standards Act (FLSA) generally requires that nonexempt employees who work more than 40 hours in a workweek be paid 1.5 times their “regular rate” for the hours above 40. Calculating overtime pay is simple if the employee receives only a basic hourly rate as compensation. However, things get more complex if the employee receives other payments, such as bonuses. That’s because the “regular rate” used to calculate overtime must include “all remuneration for employment paid to, or on behalf of, [an] employee.” Failing to include certain bonuses when calculating overtime pay may violate the FLSA and give rise to overtime liability.
Gifts and discretionary bonuses generally do not have to be included in the regular rate of pay. Exempted gift payments, such as Christmas or other special occasion bonuses and anniversary bonuses to long-serving employees, must be unrelated to hours worked, production or efficiency, and not so large that employees would consider them part of their regular wages. A bonus is discretionary if: (1) the employer has the sole discretion to determine whether the payment will be made and the amount of the payment; and (2) the payment is not made pursuant to a prior promise or contract. Employers must be careful not to communicate promises to nonexempt employees about paying year-end bonuses beforehand if they wish to exclude such payments from overtime pay calculations.
In contrast, non-discretionary bonuses must be included in the regular rate and therefore will increase overtime payments. Generally, a bonus is non-discretionary if the employer contracts, agrees, or promises to pay it. Examples of non-discretionary bonuses include:
- any bonus which is promised to employees upon hiring;
- any bonus guaranteed in a collective bargaining agreement;
- bonuses announced to employees to induce them to work more steadily, rapidly or efficiently, such as attendance, production and quality bonuses; and
- retention bonuses.
Gifts and bonus payments made pursuant to a contract cannot be considered gratuitous or discretionary.
If a non-discretionary bonus is paid for a weekly pay period, the amount is simply added to the employee’s regular rate for that week. The U.S. Department of Labor’s regulations under the FLSA provide that, where payment of the bonus is deferred, the employer temporarily may disregard the bonus when calculating overtime pay. Once the amount of the bonus can be determined it must be apportioned back over the period in which the bonus was earned. In other words, the employer must examine the workweeks and then calculate and pay additional overtime owed because of the bonus.
Thus, while bonuses are commonly used to reward and retain employees, employers must consider their potential effect on overtime obligations under the FLSA (and similar state wage and hour laws). For more information, please contact a member of our Employment Law Group.