Wage and Hour Alert: Paying Non-Exempt Employees Overtime and Bonuses

04.09.13

Overtime and Bonuses – Employers Vulnerable to Significant Liability

Companies commonly use bonuses to encourage and reward employees for higher levels of productivity or quality of work. Or, a bonus may be unexpectedly provided after a company experiences a profitable season and management wishes to thank employees for their contribution. Yet, companies must be aware of the potential liability when bonuses are paid to non-exempt employees who are also earning overtime.

There are essentially two types of bonus structures when thinking about overtime implications – discretionary and nondiscretionary. Discretionary bonuses are those payments that are given without any expectations and are not announced in advance, for instance, a one-time bonus that serves to reward an employee for outstanding performance solely at the discretion of the employer. These bonuses may be same amount for all employees in a designated group without any consideration for individual performance. On the other hand, non-discretionary bonuses are based upon an employee’s achievement of pre-set metrics such as quantity or efficiency of production, or even attendance.

It is not uncommon for employers to forget that the Federal Fair Labor Standards Act (FLSA) requires them to calculate overtime worked during the period covered by nondiscretionary bonuses and include the bonus payment in the overtime rate.   For example, if an employee is paid a bonus that covers the past month, the employer must readjust any overtime payments the employee earned during that period. These overtime payments must reflect the adjusted hourly rate of pay, which is calculated by adding the bonus pay to the regular hourly rate. The same principle applies to bonuses that are paid once a year, which can create accounting headaches for the employer, as each week must be analyzed to calculate overtime hours.

If an employer is found to not be paying overtime on nondiscretionary bonuses, it can lead to serious monetary liability including past overtime payments and fines.

Calculating the overtime on the bonuses crosses the eyes of most payroll professionals, however the Department of Labor provides the following guidance for an employee receiving a $2000 retention bonus earned over a six-month period. In the following calculation, the $2,000 retention bonus was earned over six months or 26 weeks, for a weekly equivalent of $76.92 ($2000 ÷ 26 weeks). If the employee worked ten hours of overtime in their 9th week of employment, the employee would be due an additional $7.70 in overtime earning as follows:

$76.92 ÷ 50 hours =

$1.54 (increase in the regular rate)

$1.54 x ½ =

$ .77 (increase in the additional half-time)

$ .77 x 10 hours of overtime worked =

$7.70 (increase in overtime earnings due to the bonus)

While the calculation may seem tedious to pay $7.70 to a single employee, by the time additional weeks of overtime are added in, multiplied by the number of employees for a two or three year limitations period, this $7.70 can grow even without litigation.   If wage and hour litigation is pursued, the back pay mentioned above plus plaintiff attorney fees and employer defense costs as well as employer staff time and the dollars may swell  to several hundred thousand dollars.

Employers that are either thinking about implementing a bonus program, or those that have been paying bonuses for some time should consult with their attorneys to make sure they avoid running afoul of the FLSA.   Those employers considering the introduction of an incentive program for non-exempt employees should first ask employment counsel to help them determine the best way to structure the program to ensure compliance with the FLSA. By all means, employers that have not been making overtime payments when they pay bonuses or incentive payments should consult with counsel on how to calculate the back pay and avoid penalties.

 
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