Monday, July 1, 2019

Don’t forget about overtime pay when providing bonuses to non-exempt employees

Last week Chipotle announced a new bonus plan that could earn its employees up to an extra month of pay each year. Per the chain’s press release, the program is offered quarterly and can result in a bonus worth one week’s pay, calculated as an individual’s average weekly pay per quarter. To qualify for the quarterly bonus program, restaurant teams must meet certain sales and cash goals.

This bonus program has the potential to be a great way for the restaurant to break through in a tight labor market to attract talent. It also, however, has the potential to pose an FLSA nightmare. Bonus payments often count as part of a non-exempt employee’s regular rate of pay, thereby increasing the overtime premium owed to that employee.

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). Non-discretionary bonuses do not full under one of those seven exempted categories. A bonus paid pursuant to an incentive program (like the program Chipotle just announced) is the definition of “non-discretionary,” and therefore must be accounted for in the calculation of an employee’s regular rate of pay for overtime calculation purposes.

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 allocated 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 bonuses to hourly and salaried non-exempt employees, you should run it past employment counsel before making the payments to ensure you are not committing an FLSA violation in the mechanics of the bonus payment.