The Fair Labor Standards Act (FLSA) requires that overtime pay be determined using the employee’s “regular rate” of pay, which includes all earnings paid to the employee during the workweek. However, the FLSA specifically provides that certain earnings may be excluded from the regular rate, including certain bonuses where:
The bonus remains completely within the employer’s discretion
Discretionary bonuses are generally payments that an employee does not have reason to expect and are at the sole discretion of the employer such as recognition or Christmas bonsuses. Discretionary bonuses are not included in overtime calculations. On the other hand, nondiscretionary bonuses are promised or expected and tend to be dependent on the quality, quantity or efficiency of production or hours worked, and must be included in the regular rate used for determining overtime pay. Employers often forget that a nondiscretionary bonus must be included in any overtime owed.
The FLSA requires that overtime be paid at the time it is earned.
However, in the case of a bonus that is deferred for longer than a week. The regulations provide that employers may disregard the bonus in computing the regular hourly rate until the bonus amount for the workweek can be determined. Once it can be determined, the bonus amount must be apportioned back over the workweeks of the period during which it may be said to have been earned and paid out.
For those employers who do not want to go back and re-calculate overtime, there is a way to avoid this.
No such re-calculation is needed when a bonus is paid as a percentage of a nonexempt employee’s total straight-time and overtime earnings over the bonus period. By structuring the bonus payment this way, the employer is covered whether the bonus is determined to be discretionary or not.
Referneces:
- Staci Ketay Rotman is a partner at law firm Franczek Radelet P.C. She advises and represents employers on the Fair Labor Standards Act (FLSA) and related state statutes, ranging from worker classification audits to claims alleging unpaid wages. © 2012 Franczek Radelet P.C. All rights reserved. Republished with permission.
- Overtime Pay: Are companies required to pay overtime to employees classified as salaried nonexempt?, SHRM HR December 2012
- Overtime Pay: Must bonuses be included in overtime pay calculations?, SHRM HR , September 2012
