In an earlier post regarding the proposed changes to the FLSA white collar exemption, I reminded employers not to forget to recalculate the regular rate for overtime purposes following payment of a bonus – resulting in an additional payment to employees. However, this is an often overlooked concept and can be confusing. So, I thought it would be worth a quick post to help clarify as it came up the other day with another employer.
Section 7(e) of the FLSA states that non-discretionary bonuses must be included as part of the employees “regular rate of pay”. Because overtime must be paid as time and one-half of the regular rate, the regular rate then increases the overtime rate. But, let’s break this down. First, discretionary bonuses do not change the regular rate – it is one of eight types of payments that does not need to be included in the employees regular rate. 29 C.F.R. 778.208. However, a non-discretionary bonus is not excluded from the type of remuneration for employment and thus must be included into the employees “regular rate”.
How Are Bonuses Included Into the Regular Rate in a Single Pay Period?
Let’s start simple. If a non-discretionary bonus is paid because of an employee meeting a weekly goal, for example, that money is added to the employee’s other weekly earnings and divided by the amount of hours the employee worked that week. For example, let’s say the employee earns $15/hr and worked 50 hours/wk.
Straight time pay = $15 x 50hrs = $750 (regular rate is $15)
Overtime pay = $15 * 0.5 = $7.50 (overtime premium) x 10hrs = $75.00
Total compensation before bonus = $750 (straight time) + $75 (overtime) = $825
Non-discretionary bonus paid = $25
Straight time pay after bonus = ($825 + 25)/50 = $17 (new regular rate)
Overtime rate after bonus = $17 * 0.5 = $8.50 (new overtime premium)
Additional hourly overtime due = $8.50 – $7.50 = $1/hr
Total additional overtime due = $1 * 10 = $10
Total compensation after bonus = $860
So, in this scenario, the employee who worked 10 hours of overtime and received a $25 non-discretionary bonus, should also receive an additional $10 for overtime pay in the next payroll (assuming the bonus is calculated after the weekly payroll is run).
How Are Bonuses Included Into the Regular Rate When It Covers Multiple Pay Periods?
Now, real world. Rarely is a non-discretionary bonus earned weekly. For any period longer than a week, the bonus is layered back over the entire period that the bonus was paid for.
Let’s use a monthly bonus, for example. Same employee above, earns $15/hr and worked 50, 35, 42 and 30 hours, but this time received a $100 bonus for work performed over four weeks.
Straight time pay week 1 = $15 x 50hrs = $750
Overtime pay week 1 = $15 * 0.5 = $7.50 (overtime premium) x 10hrs = $75
Straight time pay week 3 = $15 x 42hrs = $630
Overtime pay week 3 = $15 * 0.5 = $7.50 (overtime premium) x 2hrs = $15
Straight time pay weeks 2, 4 = $525 + $450 = $975
Total compensation before bonus = $2,355 (straight time) + $90 (overtime) = $2,445
Non-discretionary bonus paid = $100
Weekly equivalent over 4 weeks = $100 / 4 = $25
Week 1 increase in regular rate after bonus = $25 / 50hrs = $0.50
Week 1 increase in overtime premium after bonus = $0.50 / 2 = $0.25
Week 1 increase in overtime earnings after bonus = $0.25 * 10hrs = $2.50
Week 3 increase in regular rate after bonus = $25 / 42hrs = $0.60
Week 3 increase in overtime premium after bonus = $0.60 / 2 = $0.3
Week 3 increase in overtime earnings after bonus = $0.3 * 2hrs = $0.60
Additional overtime due = $2.50 + $0.60 = $3.10
Total monthly compensation after bonus = $2,445 (payroll for hours worked) + $100 (bonus) + $3.10 (add’l overtime) = $2,548.10
So, in this scenario, the employee who worked 12 hours of overtime over 4 weeks and received a $100 non-discretionary monthly bonus, should also receive an additional $3.10 for overtime pay in the next payroll (assuming the bonus is calculated after the weekly payroll is run).
The above is meant only as a simple illustration; certainly there are many more scenarios of how the additional overtime should be paid – nothing is every as easy as it looks! If an employee receives multiple rates of pay (prevailing wage work perhaps or different jobs for same employer), or if they receive a shift differential or even a guaranteed salary plus overtime, the calculation must be made pursuant to the rules for that situation.