While many employers use bonuses to reward deserving employees for various reasons, those bonuses can create complications under the Fair Labor Standards Act (FLSA) if not handled properly. More specifically, employers must properly include bonuses paid to nonexempt employees when calculating overtime. Failing to include those bonuses in overtime calculations can result in substantial liability and financial repercussions for employers.
The FLSA requires nonexempt employees to receive overtime pay for all hours worked over 40 hours in a standard workweek. The overtime pay rate must be at least one and one-half times an employee’s regular rate of pay. However, the regular rate of pay is not limited to the employee’s hourly wage; it includes nearly all compensation paid to the employee, including most bonuses.
In determining whether to include a bonus in calculating an employee’s regular rate of pay, and, by extension, the proper overtime pay rate, the operative difference is whether a bonus is discretionary or nondiscretionary. A bonus is discretionary if the employer has total discretion over whether to pay it and how much to pay at or near the time of payment. Discretionary bonuses are excludible from an employee’s regular rate of pay and include spontaneous gifts and holiday bonuses.
On the other hand, nondiscretionary bonuses, which an employer announces in advance or provides criteria for obtaining, are includible in an employee’s regular rate of pay. Examples of nondiscretionary bonuses include production bonuses, attendance bonuses, and retention bonuses. In other words, if an employee knows the potential for a bonus based on certain actions, the bonus must be included in the overtime calculation.
Calculating an employee’s regular rate of pay by including a nondiscretionary bonus can be straightforward or more complex, depending on how it is paid. For instance, if the employer pays a bonus for a single workweek, the bonus amount is just added to the employee’s total earnings for that week. The employer then must divide total earnings by the total hours worked to determine the regular hourly rate. If the employee has worked overtime, the employee must receive an additional one-half of the regular hourly rate for each overtime hour worked.
When an employer pays a bonus that covers multiple workweeks, such as monthly, quarterly, or annual bonuses, the calculation is more complicated. In this situation, the employer must allocate the bonus across the weeks in which it was earned. Once the employer calculates the employee’s weekly earnings, it must then calculate that week’s overtime based on the number of overtime hours worked. The employer must recalculate the overtime for each week covered by the bonus; as a result, the employee’s regular hourly rate may differ from one week to the next.
To make overtime pay calculations easier, employers should keep careful records of all bonuses, whether they are nondiscretionary, and the criteria used to issue them. They should also ensure payroll systems are properly configured to calculate overtime, including bonus amounts, to avoid payroll errors. If an employer wants to pay a bonus that covers more than one workweek, it must have a standard method for allocating the bonus to each workweek and use that method consistently. Employers might consider paying more frequent bonuses to aid in these calculations, rather than issuing annual bonuses. Finally, employers should audit bonus and overtime calculations periodically to eliminate any errors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]