Incentivizing Employees with Bonuses? Watch out for overtime.

bonuses flsa overtime Alabama Employment Law
Hourly employees receive “time-and-a-half” for overtime. Many bonuses must be included when calculating an employee’s hourly rate of pay.

The labor market is tight right now.  Employers are looking for ways to attract and retain employees.  One strategy for employee retention is to pay a bonus of some kind.  Everybody likes money.  So, bonuses are a great way to increase employee satisfaction.  But, employers paying bonuses should make sure that they do not accidentally violate the Fair Labor Standards Act as a result.

Here’s the scenario.  You pay your production employees $20 per hour.  But, you also promise them a $500 bonus if they reach certain production goals.  In the vast majority of cases, you must include at least some part of that $500 in their regular rate of pay for each week in the bonus period.  If the employee works more than 40 hours during a week for which the bonus is awarded, their overtime rate increases.

In our scenario, let’s say the employer has a rush job that must be completed in one week.  The employer promises a $500 bonus if production goals are met during the week.  The rush job requires an employee to work 60 hours during the week.  Ordinarily, the employee would receive $1,200 for 60 hours of work, plus $200 for overtime, for a total of $1,400.  But, with the $500 bonus, their regular rate of pay for the week would be:  $1,700 ($1,200 + 500), divided by 60 hours, for a regular hourly rate of $28.33.  Overtime would be calculated based on $28.33 per hour rather than $20.00.  As a result, the employee would be entitled to an additional $14.17 for each of the 20 hours of overtime, resulting in $283.40 owed for overtime.  In total, they would be owed: (1) $1,200 for working 60 hours at $20 per hour; (2) $500 for the production bonus; and, (3) $283,40 for overtime.  The total would be $1,983.40.

You might say:  “That’s only a difference of $83.40.”  But, scale matters.  If you owe $83.40 to 500 employees, your FLSA liability is now at least $41,700.  Additionally, even mis-payment to one employee can be costly.  The FLSA awards attorneys fees to employees who successfully sue for violations of the overtime laws.  Also, an experienced employee-rights attorney will almost certainly allege that the employer has a practice of failing to correctly calculate the hourly rate and ask a judge to certify a collective action under the FLSA.  Even if there is no such practice, you will probably spend a substantial amount in legal fees defending the claim.

Please note that the foregoing example is extremely simplified because it assumes that the bonus is paid for work performed solely in one week.  If the bonus period is longer, the math becomes more complex because the total amount of bonus is evenly distributed over the bonus period.  In our scenario, if the bonus was awarded for meeting production goals over the course of four weeks, the $500 would be divided by four and and extra $125 would be allocated to each of the four weeks.  This can require employers to retroactively calculate overtime amounts in many cases.

Not all bonuses must be included in the regular rate of pay for the week.  One of the primary issues in litigating these claims is whether the bonus was “discretionary” or “non-discretionary.”  If a bonus is non-discretionary, it must be included in the regular rate of pay for the week.  Here are some of the examples the United States Department of Labor gives for non-discretionary bonuses:

  1. any bonus which is promised to employees upon hiring
  2. any bonus which is the result of collective bargaining
  3. bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently
  4. bonuses which are announced to employees to induce them to remain with the fir
  5. most attendance bonuses
  6. individual or group production bonuses
  7. bonuses for quality and accuracy of work
  8. bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made.

29 C.F.R. § 778.211(c).

Obviously, these overtime scenarios can get complicated quickly.  If you are paying bonuses to employees, work carefully with your bookkeeping department, your CPA and, if necessary, your employment lawyer to make sure that you comply with FLSA.