The Fair Labor Standards Act (“FLSA”) defines certain employees as exempt and others as nonexempt. Nonexempt employees are generally entitled to receive overtime pay at a rate of at least one and one-half times the employee’s regular rate of pay. Overtime is often easy to calculate on straight weekly earnings, but what happens when employees earns a bonus on top of their regular rate of pay? The answer is that it depends.
Discretionary vs. Nondiscretionary Bonuses
Bonuses can be considered discretionary or nondiscretionary. Bonuses are discretionary if the employee has no expectation of payment, the employer retains freedom to decide the amount and timing of payment, and the bonus is not tied to meeting specific goals. These types of bonuses are not reflected in overtime rate calculations. Nondiscretionary bonuses, on the other hand, are those that are provided to employees in an effort to encourage them to work more efficiently, rapidly or those that encourage employees to remain with the employer. Nondiscretionary bonuses can include such things as hiring bonuses, attendance bonuses, production bonuses, retention bonuses, profitability bonuses, or bonuses tied to quality and accuracy of work. These types of bonuses are the kind that must be considered part of a nonexempt employee’s total wages for the purposes of calculating overtime.
Overtime Rate and Nondiscretionary Bonus
The FLSA requires that overtime pay be calculated on an employee’s regular rate of pay, and any nondiscretionary bonuses an employee earns must be factored into the employee’s regular rate of pay. This is relatively easy to calculate when bonuses are earned and paid during the pay period, but recalculating the regular rate of pay becomes much more difficult when bonuses are earned over a series of pay periods, such as quarterly or annually.
Because certain bonuses are not earned until well after the pay period, it is permissible for an employer to disregard the bonus when initially computing the regular rate (and overtime) of pay, but once the bonus becomes known and is paid, the employer is required to retroactively recalculate the regular rate of pay for each workweek in which the bonus was earned in order to pay additional overtime compensation on the bonus. So how exactly is this done?
As explained by the Department of Labor, if an employee receives a productivity bonus of $2,000 after six months, the employer is required to calculate any additional overtime earnings the employee is due for each week the employee worked overtime hours. Overtime is not being calculated retroactively for all wages paid—the employee already received overtime pay on his or her base wage—it is calculated on the additional wages, i.e. the bonus, and only one half of the increase in the regular rate of pay is due for each overtime hour worked.
For purposes of this example, suppose that the employee worked 50 hours (10 hours of overtime) in the 9th week of the bonus period. The calculations would be done as follows:
Step 1: $2,000 ÷ 26 weeks (6 months in bonus period) = $76.92
Step 2: $76.92 ÷ 50 hours (total hours worked in week nine) = $1.54 (increase in the regular rate)
Step 3: $1.54 x ½ = $.77 (increase in the additional overtime premium rate)
Step 4: $.77 x 10 hours of overtime = $7.70 (increase in overtime earnings)
Employers engaging in these calculations must do the same calculation for each week of the bonus period in which the employee worked overtime hours. This can undoubtedly feel like a daunting process for an employer, so it is important to keep records of hours worked on a week-by-week basis.