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Holiday bonuses may cause FLSA headaches

by Kara E. Shea

Many employers provide bonuses to employees this time of year, including everything from holiday turkeys to annual longevity pay. However, employers that play Santa must be mindful that under the federal Fair Labor Standards Act (FLSA), some bonuses may require additional overtime pay to nonexempt employees.

Payments that affect overtime
First, you need to understand that for all compensation tendered to nonexempt employees (whether in the form of payroll dollars, “free” trips, country hams, or whatever else you’re handing out to show your appreciation), you must ask, “Is the employee’s overtime entitlement affected by this payment?” Generally (the actual regulations are fairly convoluted), any payments made based on (1) work performed, goals achieved, or results attained by the employee and/or (2) promises made by the employer must be retroactively factored into the calculation of overtime pay owed to the employee during the time period in which the compensation was earned.

In other words, if you make a bonus payment that triggers overtime obligations, you’ll have to go back and recalculate the regular and overtime rate for the employee for all workweeks covered by the bonus. For instance, let’s say that every December you pay a $500 bonus to all employees who achieve a perfect safety record for the year. This is a perfect example of a nondiscretionary bonus payment because it is both promised ahead of time by the employer and tendered based on a result achieved by the employee.

If the employees receiving safety bonuses worked any overtime during the course of the year, you’re going to owe them more overtime as a result of the bonus payment. Since it’s an annual bonus, you’ll need to apportion the $500 over all of the preceding workweeks in the year (let’s say 50), which means employees receiving the bonus must be deemed to have earned an additional $10 per week. For the nonovertime weeks, the extra pay won’t matter. But for weeks in which employees worked overtime, you must add the $10 to their other earnings for the week and figure out what the regular and overtime rates would have been and how much additional overtime pay they would have received that week. Then you add up the extra overtime pay for all the overtime weeks and present it to employees along with their bonus payments.

Payments that may be excluded
On a happier note, federal regulations specifically provide that sums paid as gifts or bonuses “given as a reward for service, but not based upon hours worked, production, or efficiency” do not trigger these troublesome retroactive overtime pay obligations. However, for the exclusion to apply, the payment must be “discretionary,” meaning it isn’t promised to employees ahead of time and you retain the sole discretion on whether it will be paid and, if so, how much it will be.

Careful, though ― the regulations also warn that if this type of “atta boy/atta girl” bonus is so large or paid on such a regular basis that employees count on it as part of their regular wages (National Lampoon’s Christmas Vacation , anyone?), it must be factored into your annual overtime obligations.

Finally, federal regulations provide that if you make bonus payments based on a percentage of the employee’s overall income (including overtime), you need not pay any additional overtime to the employee, even if the payments are nondiscretionary.

Wage & Hour Compliance: Practical Solutions for HR

Bottom line
If all this sounds complicated, trust me, it is. If you pay out bonuses or gifts at the beginning or end of the year ― or anytime, for that matter ― your best bet is to consult with an experienced employment attorney to make sure you are in compliance with the FLSA.

Kara Shea is a partner with Butler, Snow, O’Mara, Stevens, and Cannada, PLLC, practicing in the Nashville, Tennessee, office and a member of the Employers Counsel Network. She can be reached at (615) 244-9270 or Kara.Shea@butlersnow.com.

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