Everyone likes a bonus, right? Employees enjoy receiving them, for obvious reasons, and employers use them as a means of rewarding employee achievements and increasing morale. But while paying employees a bonus can seem like a relatively straightforward benefit, depending on how the employer structures the bonus, the bonus can have long-reaching affects by increasing a non-exempt employee’s regular rate of pay for overtime purposes.
With the changes to the Fair Labor Standards Act taking effect on Dec. 1, 2016, many employers have employees who were once exempt but no longer will be. If those employees have historically been eligible for bonuses, the employer may be underpaying those employees without realizing it. Plaintiff and defense attorneys should be aware of this issue when assessing wage and hour claims.
The FLSA and its regulations address when a bonus must be included in a non-exempt employee’s regular rate of pay for calculating overtime. (See generally 29 C.F.R. 778.209, et seq.) As a starting point, it is important to remember that under the FLSA, the “regular rate of pay” should include all remuneration for employment paid to or on behalf of an employee, unless one of the FLSA’s exceptions applies. Additionally, if an employer claims one of those exceptions and it is challenged by the Department of Labor, it is the employer who bears the burden of demonstrating that the type of pay at issue falls into the exception and thus is not included in the regular rate of pay.
One of the exceptions to the inclusion of all remuneration is what the FLSA calls a “discretionary bonus.” Certain types of bonuses will never be discretionary, such as a bonus that is based on a prior promise, agreement, or contract. Even if the bonus does not fall into one of these exclusions, the bonus will only be discretionary if the employer obtains discretion over two aspects of the bonus: (1) the fact that the bonus payment is going to be made, and (2) the amount of the bonus payment. The regulations provide helpful examples of this point:
- An employer promises in January to pay its employees a bonus in June, but does not know the amount yet. The employer has given up its discretion regarding (1), the fact that the bonus will be paid, and so the bonus is not “discretionary” under the FLSA. It must be included in the regular rate of pay.
- An employer promises to sales employees that they will receive a monthly bonus computed on the basis of allocating 1 cent for each item sold whenever, in the employer’s discretion, the financial condition of the employer warrants payment of the bonus. The employer has given up its discretion regarding (2), the amount of the bonus payment, and so the bonus is not “discretionary” under the FLSA. It must be included in the regular rate.
So the next question is, if you have a non-discretionary bonus and it must be included in the regular rate of pay, how do you calculate the regular rate to include the bonus? If the bonus is earned over one workweek, the calculation is simple: simply add the bonus to the employee’s other earnings for that workweek and divide by the total number of hours the employee worked. If, on the other hand, the bonus is earned over a longer period of time, the bonus should be apportioned back over the workweeks during which it was earned. So, for example, if you pay a $5,000 retention bonus after six months of employment, that $5,000 bonus should be apportioned over the workweeks included in the six-month period. For overtime calculations, the employer would then take ½ times the hourly rate of pay allocable to the bonus payment and multiply it by the number of overtime hours worked in that workweek.
Those of us advising employers should make sure they understand these rules when assessing how to comply with the new FLSA exemption rules. Those of you who represent employees should be aware of these rules when assessing an employee’s potential wage and hour related claims.
Murphy H. Fletcher is an attorney with McGuire, Wood & Bissette, P.A. in Asheville. She represents employers in employment, benefits, and tax matters.