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Bonuses Under FLSA and Calculation of Overtime

By Laura L. Stover, SHRM-SCP, SPHR, HR Manager
     Terri R. Enfusse, Payroll Supervisor

There are two types of bonuses employers need to be aware of to ensure they pay their employees the proper overtime wages. Understanding the difference between these bonus types can help the employer avoid any potential grievances filed by employees and ensure they pay overtime wages according to the Fair Labor Standards Act (FLSA). Understanding these bonuses and the term ‘regular rate of pay’ are key components to maintaining compliance with FLSA standards.

Regular Rate of Pay
Regular rate of pay is not the same as the employee’s hourly rate of pay. Regular rate of pay is all remuneration for employment paid to the employee divided by the total number of hours worked during the week. The regular rate of pay is based upon facts, cannot be sidestepped by an agreement, and may not be lower than minimum wage.

The formula to compute the regular rate is:
Total compensation* in the workweek (except for statutory exclusions) ÷ Total hours worked during the workweek = Regular Rate for the workweek
*Total compensation = hourly rate x hours worked + bonus

Discretionary Bonus
A discretionary bonus is a form of variable pay where the amount, timing, requirements, and knowledge of the bonus are not disclosed to the employee in advance. Discretionary bonuses are excluded from the regular rate of pay. A few examples of the discretionary bonus are:

  • An employee overcomes a challenging or stressful situation
  • Extraordinary efforts not awarded according to pre-established criteria
  • Employee of the month
  • Severance
  • Referral bonus to employees not primarily engaged in recruiting activities (subject to additional criteria)

Non-Discretionary Bonus
A non-discretionary bonus must be paid out if certain criteria are met. The bonus is established ahead of time, is announced, and is expected to be received by the employee upon meeting the required criteria. Non-discretionary bonuses are included in the regular rate of pay. Employees will know about and expect the bonuses. A few examples are:

  • Predetermined formula, such as an individual or group production bonus
  • Quality and accuracy of work
  • Announcement to employees to induce them to work more efficiently
  • Attendance bonuses
  • Safety bonuses

Calculating Overtime When Non-Discretionary Bonuses Are Paid
When an employer pays a bonus covering a time period when an employee has worked overtime, the employer will need to review the employee’s work hours for the pay week(s) in question and review the bonus type (discretionary or non-discretionary) to determine if additional overtime pay is owed to the employee. The requirement to pay additional overtime applies even if the bonus is paid after the pay period to which the bonus relates.

The following examples illustrate possible scenarios where additional overtime is required.

Example #1 - A non-exempt employee is paid $10 per hour and receives a $50 bonus for the week as promised for helping to produce a special order for a customer two weeks earlier than previously scheduled. The employee worked 43 hours during the week.

  • Employee has 3 hours of overtime
  • Employee was promised a bonus; therefore, this is a non-discretionary bonus
  • Bonus is based on a predetermined formula, individual/group production bonus

Calculation of pay:
$10 per hr x 43 hrs = $430 (total compensation for straight time)
$430 + $50 bonus = $480 (total compensation)
$480 ÷ 43 hrs = $11.16 (regular rate of pay)
$11.16 x .5 = $5.58 (half time premium pay rate)
$5.58 x 3 overtime hours = $16.74 (overtime pay due)
$480 + $16.74 = $496.74 (total due to employee)

Example #2 - Employee worked 45 hours, 30 of which were evening shifts. The hourly rate is $15 per hour plus an evening shift differential of $1 per hour. The employee receives a promised $100 bonus.

Calculation of pay:
$15 per hr x 45 hrs = $675 (compensation for straight time at $15 per hr.)
$1 x 30 hrs = $30 (shift differential for the evening shift)
$675 + $30 (shift diff) + $100 bonus = $805 (total compensation)
$805 ÷ 45 hrs = $17.89 (regular rate of pay)
$17.89 x .5 = $8.95 (half time premium pay rate)
$8.95 x 5 overtime hours = $44.75 (overtime pay due)
$805 + $44.75 = $849.75 (total due to employee)

Example #3 - A non-exempt employee is paid a $400 monthly non-discretionary bonus. The bonus is paid a month after the bonus was earned. Since wages were already paid during the week the bonus was earned, the employer must:

  • Review the employee’s workweeks of the previous month to determine if overtime hours were worked
  • Determine additional amount of overtime compensation due to employee for each week overtime hours were paid
  • If the employer is unable to allocate which workweek the employee earned the bonus, the employer may assume the employee earned an equal amount of bonus each week.
  • For this example, there are four weeks in the month the bonus was earned - $400 ÷ 4 = $100 per week

The employee worked one week in the previous month with overtime. During that week, the employee worked 43 hours at $10 per hour.

Calculation of regular rate of pay for overtime calculation:
$10 per hr x 43 hrs = $430 (total compensation for straight time)
$430 + $100 bonus = $530 (total compensation)
$530 ÷ 43 hrs = $12.33 (regular rate of pay)
$12.33 x .5 = $6.17 (half time premium pay rate)
$6.17 x 3 overtime hours = $18.51 (half time premium pay due)

Employee originally received gross overtime pay of $45 (3 hours at $15/hr.).

Calculation of additional compensation due:
3 hrs x $10.00 = $30.00 Straight time compensation
3 hrs x $6.17 = $18.51 Premium half time compensation
$48.51 Total overtime compensation
3 hrs x $15.00 = $45.00 Previously paid overtime
$ 3.51 (Additional overtime compensation due)

To avoid employee grievances and possible findings and penalties when undergoing Department of Labor audits, it is important to properly communicate the type of bonuses being awarded to the employees with your payroll staff or payroll provider.

While the above examples reflect small amounts of additional compensation due to the employee, the results could be substantially larger if the bonus and hourly rate of pay has greater value. Regardless of the adjusted amount due to the employee, to maintain compliance with the FLSA, the regular rate of pay must be calculated to ensure the proper overtime compensation is being paid when non-discretionary bonuses are awarded.

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