As the holiday season approaches, employers and employees are beginning to anticipate holiday bonuses. Whether they come in the form of material gifts, cash awards or other benefits, employers should be careful in providing them, because sometimes bonuses must be included in the employee’s pay rate.
Although “improper bonus” cases are not common, they still involve serious penalties. For example, in Solis v. Kinder Morgan Energy Partners LP, et. al., No. 4:11-cv-00454 (S.D. Tex. Feb. 4, 2011), the U.S. Department of Labor settled overtime claims with a company for $830,000, after the company failed to pay proper overtime on bonus payments issued to nearly 4,500 employees. Other companies, such as Office Depot and The Wellpoint Companies, recently have been sued for alleged improper overtime calculations as a result of failing to account for bonuses.
Step One: Calculate the Regular Rate of Pay
The Fair Labor Standards Act requires employers to pay nonexempt employees one and one-half times their regular rate for each hour worked over 40 in a workweek. To ensure proper overtime payments, an employer must be sure it has properly calculated employees’ regular pay rates.
This calculation is two-pronged. First, the employer needs to determine which payments need to be included in the regular rate. Second, the employer must average the total payments over the employee’s work hours, to determine the employee’s hourly wage.
However, the FLSA excludes eight types of payments from the regular rate, and one of those payments is the discretionary bonus. Thus, employers need to know the difference between discretionary and nondiscretionary bonuses before calculating any overtime.
Discretionary bonuses are when the employer has discretion both on whether the payment is actually awarded and on the amount of the payment until a time close to the end of the period for which the bonus is paid. Nondiscretionary bonuses, on the other hand, typically are those agreed to, promised or contracted.
Thus, for FLSA purposes, only nondiscretionary bonuses affect the overtime calculation.
Step Two: Calculate the Overtime Rate of Pay (and Include the Nondiscretionary Bonus)
To calculate the overtime due for a week covered by a nondiscretionary bonus, the employer must first calculate the average rate of pay for the week, given the impact of the bonus. To do this, the employer must:
- add the nondiscretionary bonus paid (or the value of the nondiscretionary bonus given) to the total pay for the week; and then
- divide that sum by the total number of hours worked.
The resulting pay rate is then halved and multiplied by the number of hours worked over 40 to calculate the overtime compensation that is due.
For the full story, with examples of such overtime calculations, click here.