Do we have to factor employees’ performance bonuses into their overtime pay?
Quick Answer
Yes. Because a performance bonus is a non-discretionary bonus, it must be included in the regular pay rate of non-exempt employees and factored into their overtime pay.
Legal Perspective
Foley & Lardner LLP
Chicago, Illinois
The FLSA says non-discretionary bonuses (those based on meeting production, sales or other performance standards) must be factored into the “regular rate,” which is used to determine overtime pay, says employment law attorney Bennett Epstein (BEpstein@foley.com) of the firm Foley & Lardner LLP.
If the employer can determine precise weeks the employee earned the bonus, it must retroactively attribute the bonus to those weeks. If the employer can’t identify the specific weeks in which the bonus was earned, then the bonus must be allocated across the entire bonus period. Either way, the employer must pay additional overtime based on the bonus.
Relevant Case Law
Russell v. Government Employees Insurance Co.
Pytelewski v. COSTCO
Schmitt v. State of Kansas
HR Insight
ERC
Jacksonville, Florida
Based on the Fair Labor Standards Act (FLSA), bonuses that are non-discretionary are factored into a non-exempt employee’s rate of pay for overtime, says Senior Director of HR Anna Ratcliff.
A performance bonus is usually non-discretionary because it is based on criteria that is predetermined by the employer and is expected by the employee. It is an incentive for employees to perform better. An example is when an employee gets a $500 bonus every week if they pull in over $10,000 in sales in the same week.
The Cost of Noncompliance
FLSA violations: Hospital underpaid their heroes during pandemic
Who was involved: Expertus Health LLC, the operator of Perry Community Hospital in Tennessee, and essential healthcare workers during the pandemic.
What happened: An investigation by the DOL found the hospital missed three payrolls in November of 2020 leading to FLSA minimum wage and OT violations. It also deducted break time from employees’ work hours. In addition, the facility:
- Paid employees straight time for hours worked and failed to pay OT
- Failed to include earned bonuses in the calculation of OT pay, and
- Misclassified an employee as an independent contractor.
Result: The DOL recovered $163,785 in back wages for 72 workers.
Info: DOL Recovers $163K For 72 Healthcare Workers After Investigation Finds Hospital Missed Payrolls During Pandemic, 9/15/21.
Caregivers cheated out of OT pay: Company pays nearly $3M for FLSA violations
Who was involved: Petersen Health Care, Inc. and 3,024 caregivers at 84 residential nursing care facilities across three Midwestern states.
What happened: The DOL’s Wage and Hour Division found the company failed to pay employees the correct amount of overtime in violation of the Fair Labor Standards Act (FLSA). Specifically, it did not pay wages for meal periods of less than 20 minutes; did not add bonuses and other incentive pay to workers’ hourly rate when calculating overtime pay; and did not maintain accurate records of work hours, the investigation determined.
Result: The company agreed to pay $2,939,576 in back overtime wages. The company’s primary owner and CEO also signed an agreement with the DOL to comply with the FLSA in the future.
Info: Illinois Company Pays $3M in OT, Back Wages to 3,024 Caregivers After Federal Investigation, 5/24/22.
Key Takeaways
- Non-discretionary bonuses, which are bonuses that are paid upon satisfaction of pre-set conditions, must be included in overtime pay calculations for non-exempt employees.
- Examples of non-discretionary bonuses include production bonuses, bonuses for work quality or accuracy, attendance bonuses and safety bonuses.
- Holiday bonuses and sign-on bonuses may be excluded from overtime rate calculations as gifts so long as they are not tied to quality or quantity of work.
- An employer may pay the bonus at the end of the bonus period by retroactively calculating the regular rate for each pay period in the bonus period and paying the additional overtime compensation that is due on the bonus.
- For each workweek during the bonus period, the employer must pay an additional amount equal to half of the hourly pay rate for that week times the number of overtime hours worked that week.
- If it is not possible to precisely allocate the amount of the bonus earned in particular weeks, an employer may average the bonus earnings across workweeks.
- Alternatively, an employer may pay a fixed percentage bonus that simultaneously pays overtime compensation due on the bonus.
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