Including bonuses in the overtime rate

 

*Updated with video – see below*

This week’s tip is not the most exciting aspect of labor law (if such a thing exists). However we bet that it’s the most common violation found in Fair Labor Standards Act audits.

Before we get into the nitty gritty math examples let’s go over some basic definitions:

Bonus: Extra money given to an employee.
Non-discretionary bonus: A type of bonus given where the employer has given up discretion regarding the bonus.  The employee knows what he/she needs to do in order to receive the bonus. Common examples of non-discretionary bonuses are sales commissions, attendance bonuses, safety bonuses and performance based bonuses.
Discretionary bonus: A type of bonus given where the employer has retained discretion regarding the bonus. Example: boss says to employee Jane “Hey Jane thanks for being such a great employee and working hard to get the new store up and running – here’s a check for $1,000.”
Regular Rate: An employee’s hourly rate of pay in a given week which includes all remuneration except a few specific types of pay.  The regular rate includes commissions and non-discretionary bonuses. It does not include discretionary bonuses.
Overtime premium:  The additional half of a non-exempt employee’s regular rate owed on every hour worked after 40 in a single week.

Now that we’ve got the definitions down let’s explain the problem with a simple example.

Let’s say that employee Jane is paid $10 per hour. She works 45 hours per week.  She is also eligible for a weekly attendance bonus of $20.00 if she comes to work every day on time and doesn’t have any unapproved leave.  You have been paying her like this on her paycheck:

Hours Description Rate Gross pay
45 straight time $10.00 $450.00
5 overtime premium $5.00 $25.00
Attendance Bonus $20.00
Total $495.00

However, if we look back at the definition of the regular rate shown above it states that the regular rate includes non-discretionary bonuses.  You were paying Jane’s overtime based on a regular rate of $10.00 per hour ($10 * 0.5 = $5.00 hourly overtime premium).  That $10.00 regular rate does not include the $20.00 attendance bonus you paid her.

In order to figure out Jane’s correct regular rate for this week you must do the following calculation:

Total pay (not including overtime premium) / total hours = regular rate

($450.00 + $20.00) / 45 hours = $10.44 per hour

Overtime premium per hour = $10.44 / 2 = $5.22

So Jane’s paycheck should show:

Hours Description Rate Gross pay
45 straight time $10.00 $450.00
5 overtime premium $5.22 $26.10
Attendance Bonus $20.00
Total $496.10

If you’re thinking that this is not a big deal because you only “underpaid” her $1.10 you’re right. In a situation where the bonus is so minimal it doesn’t result in a large underpayment.  However consider what would have happened if Jane had received a $20 attendance bonus that week AND $400 in commissions!

You would have paid her:

Hours Description Rate Gross pay
45 straight time $10.00 $450.00
5 overtime premium $5.00 $25.00
Attendance Bonus $20.00
Commission $400.00
Total $895.00

And it should’ve been:

Hours Description Rate Gross pay
45 straight time $10.00 $450.00
5 overtime premium $9.67 $48.35
Attendance Bonus $20.00
Commission $400.00
Total $918.35

So that’s a difference of $23.35.  Again, it’s not much per employee, but what if you have 100 employees like Jane?  That’s $23.35 per week * 100 employees * 104 weeks (the period a FLSA audit will cover) = $242,840.00 owed in overtime back wages + $242,840.00 owed in liquidated damages = $485,680.00 total (which does not include any applicable fines).

And just so you don’t think we’re making this stuff up –  here’s the actual regulation.

Check out our YouTube video on this topic!

We hope you found this week’s tip helpful and informative. Please pass it along to anyone you think might be at risk as a result of not including bonuses in overtime.  Or if you’re still confused – contact us and we’ll do some more examples! Follow us on facebook to get the next Tip of the Week on your newsfeed!

Link: http://laborbrain.com/tip-of-the-week-including-bonuses-in-overtime-rate/

–      By Kalen Fraser

The Labor Brain Inc. is not a law firm and its employees do not practice law or provide legal services.  The information provided on our website,  in email correspondence with representatives of The Labor Brain, and at outreach events is for informational and educational purposes only.  The information provided is not a substitute for the advice of an attorney.