Do you know? Year-end bonus payments could count as part of a non-exempt employee’s regular rate of pay, thereby increasing the overtime premium owed to that employee. Given the current economic state, fewer companies are likely to pay bonuses this year, but these rules are important to heed when bonuses are paid to hourly and salaried non-exempt employees.
Section 7(e) of the Fair Labor Standards Act requires the inclusion in the regular rate of pay all remuneration for employment except seven specified types of payments. Bonuses that do not qualify for exclusion from
the regular rate under one of the seven exceptions must be totaled with other earnings to determine the regular rate upon which the overtime premium rate must be based.
A bonus could fall under one of two exceptions: discretionary payments, or gifts made at Christmas time or on other special occasions. Each of these two categories, however, has specific criteria that must be met before a bonus payment can be excluded from the regular rate.
Discretionary Bonus Payments
For a bonus to qualify for exclusion as a discretionary bonus, the employer must retain discretion both as to the fact of payment and as to its amount. Consider the following examples:
- An employer promises at the beginning of the year to pay a bonus at year-end in some undetermined amount. It has given up discretion as to the fact of the bonus, but not as to its amount.
- An employer promises employees that they will receive a bonus based on some mathematical formula, but if the company determines that it can afford to make the payments at that time. It has given up discretion as to the bonus’s amount, but not as to the fact of payment.
In both examples, the bonus is not discretionary, albeit for opposite reasons. For a bonus to be truly discretionary, the employer would have to retain complete discretion as whether to make the payment, and if so, in what amount. The employer cannot rely on any prior promise or agreement in making the payment or determining its amount.
Gifts, Christmas and Special Occasion Bonuses.
To qualify for exclusion under this exception, the bonus must be a bona fide gift. If it is measured by hours worked, production, or efficiency, is so large that employees would reasonably consider it part of their wages for hours worked, or is paid pursuant to some agreement or policy, then the bonus cannot be considered to be a gift.
According to the Department of Labor, the following circumstances will not disqualify a year-end payment as a gift:
- If an employer pays it with such regularity that employees are led to expect it from year-to-year.
- The amounts paid vary among employees or groups, or are tied to salary, wage, or length of service. For example, a Christmas bonus paid in the amount of two weeks’ salary to all employees and an equal additional amount for each 5 years of service with the firm would be excludable from the regular rate.
The key factors are whether there is a contract, and whether the amount is specifically tied to hours worked, production, or efficiency.
Calculating the Regular Rate with a Bonus Payment
Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing the regular hourly rate of pay and overtime compensation. For purposes of calculating the regular rate of pay, the bonus does not have to be included in its entirety in the week it is paid. Instead, an employer can apportion the bonus amount back over the workweeks of the period during which it was earned. The employee must then receive an additional amount of compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week. If it is impossible to allocate the bonus, an employer can select some other reasonable and equitable method of allocation.
If a bonus payment already accounts for the overtime premium, then no additional payment is required. For example, a bonus plan may pay, as a bonus, a 10% premium of an employee’s total compensation, including overtime premiums. In this instance, the payment already covers overtime, and no additional overtime is required.
Like most wage and hour issues, the handling of bonus payments to non-exempt employees is complex, and presents a real trap for the unwary employer. If you are considering paying a year-end or other bonus to hourly and salaried non-exempt employees, seriously consider running it past employment counsel before making the payments.