Bonuses Included in Overtime Calculations?
Under the federal Fair Labor Standards Act (FLSA), bonus payments are divided into discretionary and nondiscretionary types. Nondiscretionary bonuses are included in an employee’s regular rate of pay for the purpose of determining overtime, while discretionary bonuses are not included in an employee’s regular rate of pay to determine overtime.
Bonuses are discretionary if:
- Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer; and
- The bonuses are not paid under any prior contract, agreement, or promise causing the employee to expect such payments regularly.
Bonuses are nondiscretionary if the employer promises, contracts, or agrees to pay a bonus to the employee. Nondiscretionary bonuses include:
- Bonuses that are promised to employees upon hiring
- Bonuses that are the result of collective bargaining
- Bonuses that are announced to employees to induce them to work more steadily, more rapidly, or more efficiently
- Attendance bonuses
- Individual or group production bonuses
- Bonuses for quality and accuracy of work
- Bonuses that are announced to employees to induce them to remain with the firm
- Bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made
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Calculation. If a bonus is paid over one weekly period the calculation is simple. For example, an employee who works a 45-hour week at $10 per hour, in a week with no bonus, earns 5 hours of overtime at $15 per hour and the week’s total pay is $475 ($400 regular pay and $75 overtime). In a week with a production bonus, the employee’s regular rate of pay (for purposes of calculating overtime compensation) is determined by adding the pay for all hours worked at the nonovertime rate plus the bonus and dividing this sum by the total hours worked.
Thus, if a $45 production bonus is paid, the regular hourly rate for the week rises by $1 an hour to $11 per hour (45 hours times $10 per hour plus $45, all divided by 45); the overtime rate increases to $16.50 per hour; and the week’s total pay is $527.50 ($400 regular pay for 40 hours work, plus $45 bonus, plus $82.50 overtime pay for 5 hours of overtime work).
If the bonus is attributed to a period longer than a workweek, the bonus may be disregarded in computing the regular rate of pay until the amount of the bonus is determined. Until that time, any overtime is calculated and paid based on the regular rate of pay, exclusive of the bonus.
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When the amount of the bonus is set, it must be apportioned back over the workweeks of the period during which it was earned. An additional amount of compensation must then be paid for each workweek during the period in which the employee worked overtime.
The amount of additional pay is equal to one-half the hourly rate of pay allocable to the bonus for that week multiplied by the number of overtime hours worked in that week. For example, if the employee described above is paid a $400 bonus for a 10-week period during which the employee twice worked 45-hour weeks, $40 of the bonus is attributed to each week. The hourly rate allocable to the bonus is $1, and the employee must be paid an additional $2.50 for each of the weeks in which the employee worked 45 hours (1/2 times $1.00 times 5 hours).
In tomorrow’s Advisor, exceptions to the inclusion rule, plus an introduction to a popular guide that help you avoid the many pitfalls of wage/hour pay management.