New Guidance on the Impact of Bonuses and Overtime Pay
As most employers know, the Fair Labor Standards Act (“FLSA”) requires employers to pay employees overtime for all hours worked over 40 in a workweek. What many employers do not realize is that the overtime calculation should be based on employee’s “regular rate” of pay, which may be different than the employee’s hourly rate.
An employee’s regular rate, as defined by the FLSA, is based on “all remuneration for employment.” To calculate an employee’s regular rate of pay in a workweek, the employer must add all payments made to an employee and divide the total by the number of hours worked. For example, if an employee has an hourly rate of $10, receives a $25 bonus that week and works 45 hours, the regular rate is calculated by dividing the employee’s total straight time compensation ($10/hour times 45 hours plus $25 = $475) divided by 45 hours, which equals $10.55 per hour. The employee’s weekly pay is then calculated by adding the employee’s pay for straight time ($10.55 times 40 hours = $422.00) plus the employee’s pay for overtime (1.5 times $10.55 times 5 hours of overtime = $79.13).
It is important to note that only non-discretionary bonuses are included in the regular rate. [1] Discretionary bonuses may be excluded. However, bonus payments will only be considered discretionary if “both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.” See, 29 U.S.C. § 207(e)(3). Holiday bonuses are a classic example of a discretionary bonus since typically employers are not required to give them and the amounts vary greatly by year.
This month the Fifth Circuit addressed who bears the burden of proof on whether bonuses are discretionary and therefore excluded from the regular rate calculation. See, Edwards v. 4JLJ, LLC, --F.3d--, 2020 WL 5229686, *7 (5th Cir. Sept. 2, 2020). Although employers bear the burden of proving that an employee qualifies for an exemption from overtime (and can be paid a salary), the Fifth Circuit found that employees bear the burden of showing that the employer should have included a bonus in the regular rate. Id. In Edwards, employees established that while performance bonuses were awarded with discretion, the amount of the performance bonus was determined pursuant to a written pay scale that “shows exactly what employees will be paid if they receive a bonus.” Id. at *9-10. Because the employer did not retain discretion as to the amount of the performance bonus, the employees met the burden of showing that the bonus was considered non-discretionary and should have been included in the regular rate of pay calculation.
Please note, ExponentHR has existing overtime calculation capabilities; this case is solely providing additional clarification on discretionary versus non-discretionary bonuses. The system can include or exclude earning codes from the regular rate of pay calculation. To view your current settings, from Management view in ExponentHR, navigate to Settings > Company Codes and select “Earning Codes” from the drop-down menu. Please reach out to your Client Experience Manager for further guidance on whether a bonus is discretionary or non-discretionary and whether it will impact the calculation of overtime.
[1] In addition to discretionary bonuses, the FLSA also excludes the following from the regular rate calculation: gifts and payments in the nature of gifts on special occasions; payments for occasions where no work is performed due to vacation, holiday, illness; benefits contributions; pay for expenses incurred on employer’s behalf; premium payments for weekend and holiday work; profit sharing plans, and stock option rights.
Written by Christie Newkirk, Partner at Carrington, Coleman, Sloman & Blumenthal, L.L.P.