The Fair Labor Standards Act (FLSA) requires employers to pay overtime to nonexempt employees based on their regular pay rate and the number of hours worked in a workweek.
While this sounds straightforward on paper, employers commonly fail to realize that nondiscretionary bonus payments must be included in calculating the regular pay rate and, ultimately, the amount of overtime owed. For employers in states that have not codified an overtime statute, they must look to the FLSA for overtime compliance.
So, how can employers that pay nondiscretionary bonuses properly calculate the regular pay rate for overtime purposes?
When Is a Bonus Factored Into the Regular Pay Rate?
The FLSA distinguishes between discretionary and nondiscretionary bonuses when determining whether the bonus should be included in an employee’s regular pay rate.
A discretionary bonus is essentially any bonus that isn’t guaranteed, based on performance, or expected by the employee. A discretionary bonus is excludable from the regular pay rate.
Any bonus that doesn’t fit within all the statutory requirements of a discretionary bonus is considered a nondiscretionary bonus. Nondiscretionary bonuses include:
- Attendance bonuses;
- Productivity bonuses;
- Safety bonuses; and
- Bonuses made as part of a contract.
Additionally, commissions, incentive pay, or perfect attendance awards are considered bonuses. Nondiscretionary bonuses must be included in the regular pay rate.
Calculating Regular Pay Rate When Paying Nondiscretionary Bonuses
Once you determine whether other compensation (e.g., nondiscretionary bonuses) should be included when calculating the regular pay rate, you must take steps to properly calculate the regular pay rate so you can pay the correct overtime.
To start, identify what timeframe the bonus covered. Was the bonus paid for a certain level of production in a week or based on a quarterly project? If the timeframe is for the past quarter, you will need to go back to recalculate the compensation for anyone who worked overtime during that period.
Next, calculate the total straight-time compensation. This is done by multiplying the hours worked by the employee’s straight-time rate and adding the bonus for the timeframe in which overtime is being calculated.
Once total compensation is calculated, the new regular pay rate needs to be determined by dividing the total compensation (including the bonus, excluding statutory exclusions) by the total number of hours worked.
Can You Provide an Example?
Jane makes $16 per hour and received a $100 bonus based on a special order she completed during the week. She worked 44 hours during that week. Here’s how you calculate her overtime in that week:
- Multiply her hourly rate by hours worked: $16 x 44 = $704.
- Add straight-time pay to bonus pay: $704 + 100 = $804.
- Divide total compensation by total hours worked to obtain new regular pay rate: $804 ÷ 44 = $18.27 per hour.
- Multiply her regular rate by .5 (remember, you’ve already paid straight-time compensation): $18.27 x .5 = $9.14.
- Multiply the half-time rate by overtime hours worked to figure out the overtime pay due: $9.14 x 4 = $36.56.
- Her total compensation, including overtime comes to $840.56.
Other examples of calculations from the Department of Labor (DOL) are available in Fact Sheet 56(c).
What If I Have Not Been Properly Calculating Overtime?
After reading this article, if you discover your company hasn’t been properly calculating the regular pay rate for the purpose of paying overtime, you must complete a comprehensive audit of overtime payments with a lookback period of at least two years. The statute of limitations on an overtime claim is two years, but it extends to three years if underpayment of overtime was willful.
Seek out competent employment counsel to walk you through paying back overtime wages to employees and former employees to avoid a potential wage claim. The DOL has found this to be a common compliance issue among employers, so you should review your practices to determine whether a bonus program for your nonexempt employees has been properly implemented.
Jodi R. Bohr is a shareholder with Tiffany & Bosco, P.A., and a contributor to Arizona Employment Law Letter. She practices employment and labor law, with an emphasis on counseling employers on HR matters, litigation, and workplace investigations. She may be reached at jrb@tblaw.com.