Paying Non-Discretionary Bonuses (and proper OT) to Hourly Employees

Bonuses are great motivators for performance and a meaningful way to recognize employees that deliver excellent results for your business.  If your company plans to pay overtime eligible employee (hourly) bonuses (on a quarterly or annual basis), you need to follow the rules in the Fair Labor Standards Act (FLSA).  To help employers, the Wage and Hour Division published a July 2019 Opinion Letter on this topic.  There is also DOL Fact Sheet #23 that explains how to pay non-exempt (hourly) employees proper overtime when extra compensation (including bonuses, commissions, spiffs and cash awards) is paid to hourly employees.

Let’s recap some basics.  An employee’s regular rate (to determine the proper overtime rate) includes all monies for employment except certain payments excluded by the FLSA (for instance, premium for work performed for work on Saturdays, Sundays, and holidays, discretionary bonuses, occasional gifts for special occasions and payments when no work is performed due to vacation, holidays, or illness).  Nondiscretionary bonuses count as remuneration that an employer must include in the regular rate of pay.  If a non-discretionary bonus is based on a period of time greater than one week, the employer is left with a three (3) options for paying overtime in compliance with the FLSA.

  1. Recalculation Method: An employer may base a nondiscretionary bonus on work performed during multiple workweeks and pay the bonus at the end of the bonus period. In that case, the employer may disregard the bonus in computing the regular hourly rate until such time as the amount of the bonus can be ascertained.  Once the amount is ascertainable, generally the employer must retrospectively recalculate the regular rate for each workweek in the bonus period and pay the additional overtime compensation due on the bonus. If it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week, then the employer must adopt some other reasonable and equitable method of allocation.  One such method is averaging the bonus earnings across workweeks.
  2. Fixed Percentage Bonus on Regular and OT Hours: An employer, however, is not required to retrospectively recalculate the regular rate if the employer pays a fixed percentage bonus that simultaneously pays overtime compensation due on the bonus.  For example, a bonus that is 10 percent of straight-time wages (the hourly rate × straight-time hours worked up to 40) and 10 percent of overtime wages (1.5 × the hourly rate × straight-time hours worked over 40) does not require recalculation of the regular rate because the bonus includes the overtime compensation due on the bonus as an arithmetic fact, fully satisfying the FLSA’s overtime requirements.
  3. Bonus on Total Compensation: Similarly, a bonus that is 10 percent of total compensation—including hourly wages, overtime, bonuses, commissions, etc.—does not require recalculation.

The Opinion Letter confirms that an employer that pays a quarterly percentage bonus on an employee’s straight-time and overtime wages, would not need to recalculate the regular rate for each workweek in the bonus period to include this quarterly bonus.  So, a bonus of 15 percent of both your straight-time and overtime wages would simultaneously include all overtime compensation due on the bonus as an arithmetic fact and satisfies the requirements of the FLSA.

 

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