[author: Staci Ketay Rotman]

As 2012 comes to a close, we inevitably receive questions related to year-end bonuses.  Last year, I posted about whether employers were required to pay a pro-rata bonus to those employees who left their employment before the bonus was paid out. This year, I thought it might be helpful to remind employers of certain rules relating to bonus payments made to non-exempt employees.

Bonus Payments and Overtime

The Fair Labor Standards Act (FLSA) requires that overtime pay be determined using the employee’s “regular rate” of pay, which includes all earnings paid to the employee during the workweek.  However, the FLSA specifically provides that certain earnings may be excluded from the regular rate, including certain bonuses where:

(a) the bonus remains completely within the employer’s discretion, which the employer exercises close to the end of the period for which the bonus is paid, and is in no way required by any contract, agreement, or promise such that employees may expect the bonus, or

(b) the bonus payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan; 29 CFR § 778.200(a). 

Discretionary bonuses are generally payments that an employee does not have reason to expect and that are made at the sole discretion of the employer in recognition of services, and are not included in overtime calculations.  On the other hand, non-discretionary bonuses are promised or expected and tend to be dependent on the quality, quantity, or efficiency of production or hours worked, and must be included in the regular rate used for determining overtime pay. 

Often time employers forget that a non-discretionary bonus must be included in any overtime owed.  Therefore, the question we often see is whether the bonus is truly discretionary.  While each situation will depend on the facts associated with the bonus, where the employer offers a bonus on a regular basis and an employee has come to recognize and expect it, the bonus will likely be found to be non-discretionary. 

If found to be non-discretionary, the typical year-end bonus must be apportioned back into the workweeks in which it was earned so that the employer can re-calculate any additional overtime pay due to an employee for the period the bonus covers.  The FLSA requires that overtime be paid at the time it is earned.  However, in the case of a bonus that is deferred for longer than a week, the regulations provide that employers may disregard the bonus in computing the regular hourly rate until the bonus amount for the workweek can be ascertained.  Once it can be ascertained, the bonus amount must be apportioned back over the workweeks of the period during which it may be said to have been earned and paid out.  29 CFR § 778.209(a). 

This all seems pretty straight-forward until you realize that most bonuses are not allocated to specific workweeks.  In these situations, the regulations describe alternative methods for calculating additional overtime due for bonuses paid to cover a multiple-workweek period.  29 CFR § 778.209(b).  For example, where it makes sense to assume an employee earned an equal portion of the bonus each workweek, the employer may divide the bonus amount by the number of workweeks in the period.  Any additional overtime due the employee for a given workweek can then be calculated by dividing the weekly bonus amount by the total number of hours worked that workweek (to determine the regular rate increase attributable to the bonus) and then multiplying the result by one-half (representing half-time premium pay) times the number of overtime hours worked. 

Another example is where it is reasonable to assume the employee earned an equal portion of the bonus for every hour worked during the bonus period.  In this situation, an employer can use that assumption to quickly determine any additional overtime due.  The employer calculates the regular rate increase by dividing the full bonus amount by all hours the employee worked during the entire bonus period.  Next, the employer multiplies the result by the ½ premium and the employee’s total overtime hours during the period.  

For those employers who do not want to go back and re-calculate overtime, there is a way to avoid this.  No such re-calculation is needed when a bonus is paid as a percentage of a non-exempt employee’s total straight-time and overtime earnings over the bonus period.  29 CFR § 778.210.   By structuring the bonus payment this way, the employer is covered whether the bonus is determined to be discretionary or not.

Insight for Employers

Employers pay employees various types of bonuses – annual, longevity, production, signing, etc.  While the regulations do provide some guidance, at the end of the day, whether a bonus is discretionary or non-discretionary is a very fact specific analysis.   Like other overtime issues, if ignored, failure to properly identify and pay a bonus may lead to serious monetary damages down the road.  Even if you are familiar with these rules, if your business provides bonuses to non-exempt employees, it may be worth a few minutes of your time to confirm with an experienced employment attorney that your workers are being properly paid.