Do any of your non-exempt employees work overtime and also receive monthly, quarterly, or annual non-discretionary bonuses? If the answer is “yes,” this post applies to you!
Employers are required to factor non-discretionary bonuses into non-exempt employee regular rate calculations to determine what the employee’s overtime rate would be for the workweeks in which the employee worked overtime and earned the bonus. It is a challenge because overtime must be determined on a weekly basis, but sometimes bonuses are determined on a monthly, quarterly, or annual basis! So, what is an employer to do?
The Department of Labor (DOL) recently issued an opinion letter to provide employers some guidance on this issue.
As a reminder: Overtime is calculated weekly, at a rate based on each employee’s “regular rate of pay,” which includes “all remuneration for employment paid to, or on behalf of, the employee,” excluding certain types of compensation provided in 29 U.S.C. § 207(e). Nondiscretionary bonuses count as “remuneration” that an employer must include in the regular rate of pay.
DOL, citing its regulations, reiterated that employers don’t have to try to pay an employee overtime based on some future, hypothetical, or foreshadowed bonus payment. Instead, employers may disregard the non-discretionary bonus in computing the regular rate until such time as the amount of the bonus is known.
Once the amount of the bonus is known, the employer must retroactively recalculate the regular rate for each workweek in the bonus period and pay the additional overtime compensation due on the bonus (by calculating the difference).
If it is impossible to allocate specific percentages of the bonus to specific workweeks in the period, the employer must adopt “some other reasonable and equitable method of allocation.” One reasonable method is averaging the bonus earnings across all workweeks during that period.
Step-by-Step Process: To simplify the process, in situations where the employer is not able to proportion the monthly, quarterly, or annual bonus to specific workweeks, the employer should:
- Calculate and pay overtime based on the employee’s weekly regular rate (excluding the monthly, quarterly, or annual bonus until the amount is known) and pay the employee at payroll.
- Average the bonus earned across the workweeks within the bonus period (e.g., the month) once the bonus amount is known.
- Calculate overtime for each of those workweeks using the increased regular rate that includes the averaged bonus.
- Calculate the difference between the new amount in (3) and the amount paid in (1)
- Pay the employee the difference.
An even simpler method is to pay bonuses as a percentage of all income earned during the relevant time period and you will have incorporated your overtime payments! Don’t forget, employers control the amount of the bonus so this should be an easy way to limit your exposure (and math!).
DOL’s opinion letter: FLSA2019-7 https://www.dol.gov/whd/opinion/FLSA/2019/2019_07_01_07_FLSA.pdf
2019 FLSA Series