Paying employees productivity bonuses, attendance awards, and other types of non-discretionary incentive payments is common. Unfortunately, many organizations don’t realize that they must include these bonuses when determining the regular rate of pay when calculating overtime payments for their non-exempt employees.
Although the Fair Labor Standards Act (FLSA) does not require employers to calculate overtime to include discretionary bonuses, it is very clear that incentive payments that employees reasonably expect to receive must be included when calculating overtime. (Discretionary bonuses are those that are unexpected, one-time payments that are not part of a defined bonus plan with specific criteria.)
For those companies that do provide non-discretionary bonuses for productivity, attendance, a lump sum payment in lieu of a pay increase, etc., the FLSA expects employers to factor those payments in when calculating overtime. Here are three scenarios about how companies can calculate those payments:
1) If the bonus is paid in the same week in which it is earned, the company would calculate the bonus by taking the total earnings divided by total hours to determine the regular rate of pay. Because this initial calculation includes the straight time portion of time-and-a-half, the company only needs to calculate half-time for the overtime due. For example:
44 hours worked x $10 = $440.00
Bonus = 100.00
Total earnings $540.00
$540.00 ÷ 44 hours = $12.27 (regular rate)
$12.27 x 0.5 = $6.14 x 4 overtime hours worked = $24.56 owed in overtime.
$540 (regular rate with bonus) + $24.56 (OT) = $564.56 (total due the employee)
2) If the bonus is paid over a period of time such as a month or a quarter, the company is to first try to determine if portions of the bonus can be specifically attributed to a particular week. If it cannot, the employer must prorate the bonus over the period of time it was earned and calculate overtime on the bonus for any week in which overtime was worked. For example:
A bonus of $1000 is paid at the end of the quarter if a particular target is met. Employee works overtime in two out of the thirteen weeks.
• $1000 / 13 = $76.92 bonus for each week
• $76.92 / 42 x 0.5 x 2 OT hours = $1.83
• $76.92 / 52 x 0.5 x 12 OT hours = $8.88
• $1000 + $1.83 + $8.88 = $1010.71
3) If the bonus is paid as a percentage of gross earnings, no additional calculations have to be made when paying the bonus because overtime is already included in the calculation.
The Department of Labor’s Wage & Hour Division has published a coefficient table which also can be used to calculate overtime for non-exempt employees in a variety of circumstances including the payment of bonuses. They also have a number of tools to help employers understand their overtime obligations including an FLSA Overtime Calculator Advisor and a general overtime pay web page.
Companies that have questions about properly calculating overtime should consult with an HR professional or employment law attorney of their choice.
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