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The U.S. Department of Labor’s Wage and Hour Division recently issued an Opinion Letter that provides guidance on treatment of certain bonus payments for purposes of calculating overtime under the Fair Labor Standards Act (“FLSA”). The opinion letter confirms that bonuses paid pursuant to predetermined or formula-based plans generally must be included in an employee’s regular rate of pay for overtime purposes and cannot be excluded as “discretionary”.
The DOL examined a compensation structure that paid employees an hourly base wage in addition to bonuses tied to safety, attendance, performance, and completion of assigned duties. The bonus plan was established in advance, and employees were informed of the criteria and formulas used to calculate the bonuses before performing the work. Once the conditions were satisfied, the bonus amounts were automatically earned and could significantly increase an employee’s hourly compensation. The employer, however, excluded these bonuses when calculating the overtime rate of pay.
The DOL emphasized the distinction between discretionary and nondiscretionary bonuses. Under the FLSA, a bonus may be excluded from the regular rate only if both the decision to pay the bonus and the amount of the bonus are determined at the employer’s sole discretion, the determination is made at or near the end of the applicable work period, and the payment is not made pursuant to any prior promise, agreement, or established policy. Where, as here, the employer sets the eligibility requirements and calculation formula in advance and employees can reasonably expect payment upon meeting those requirements, the bonus is nondiscretionary and must be included in the regular rate. The DOL further noted that the presence of some managerial judgment in evaluating performance does not convert a predetermined bonus into a discretionary one.
The opinion letter also demonstrates the proper method for calculating overtime when nondiscretionary bonuses are earned. By way of example, if an employee works 46 hours in a workweek at a base rate of $15.00 per hour and earns an additional $5.00 per hour under a performance-based bonus plan applicable to all hours worked, the employee’s total straight-time compensation for the week would be $920.00. Dividing that amount by the 46 hours worked results in a regular rate of $20.00 per hour. The employer must then pay an overtime premium equal to one-half of that regular rate, which would be $10.00, for each of the six overtime hours, resulting in an additional $60.00 in overtime pay for the week.
Employers should take this opportunity to review their bonus and incentive programs, particularly those tied to safety, attendance, productivity, or performance metrics, to ensure that overtime premiums are being calculated in compliance with the FLSA and applicable state wage-and-hour laws.
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