Overtime pay obligations under the FLSA can get hairy when non-discretionary bonuses or other incentives are brought into the picture. The main issue at hand is that employers must review non-exempt overtime costs for the incentive award period if the award is non-discretionary.
Most bonuses must be included when calculating overtime. Bonus payments based on criteria related to attendance, production, efficiency, quality or quantity of work, or any other work performance standard must be included in the overtime calculation. However, there are some exceptions. Those include payments made for gratuitous reasons, or those made as gifts on special occasions that aren’t determined by hours worked, production, or efficiency. These are considered to be purely discretionary bonuses.
For FLSA compliance, employers need to go back and do an additional calculation for overtime hours worked in the period over which the non-discretionary incentive payment was made. Employers will need to take the previously calculated base pay for all hours worked and add in any non-discretionary incentive pay for that time period. The result is a newly-calculated Average Straight Time Hourly Earnings (ASTHE), which will result in awarding more overtime pay.
“There’s not a problem with non-discretionary bonuses at all. And in some cases they work really well. They’re paid routinely. People know that if they meet a particular production goal (for example), or if the expected standard is met—they’re going to get the bonus,” Katie Miller Busch explained in a recent CER webinar. “And in some cases, that works really well. And that works really well for hourly employees. It creates that connection, that line-of-sight really, really specifically.
“So, I don’t want you to think we don’t want you to use bonuses. We do want you to know though, that if you do have a standard that needs to be met, and the employee meets that standard and the bonus is paid, if it’s paid routinely, if it qualifies as non-discretionary, there’s a little bit of extra work for payroll.”
After you’ve calculated the new ASTHE, then recalculate the total overtime premiums due, based on the higher ASTHE. Subtract what was previously paid in overtime to determine the additional amount owed. Then pay the additional overtime pay. Failing to take this extra step can cause employers to be out of FLSA compliance after awarding employee bonuses to non-exempt employees.
The above information is excerpted from the webinar “Incentive Pay for Non-Exempts: Tips for Creating an Effective and Legal Pay Plan.” To register for a future webinar, visit CER webinars.
Katie Miller Busch is the owner of HR Compensation Consultants, LLC and offers more than 15 years of progressive compensation experience having worked in various industries, including high-tech, loyalty marketing, biopharmaceuticals, retail, manufacturing, and logistics solutions.