Non-Discretionary Bonuses Affect Overtime Pay, Other Wage Issues

I was probably seven years into my practice before I knew that, under the Fair Labor Standards Act (FLSA), a non-discretionary bonus (one that is simply announced in advance, even if contingent) affects the regular rate of pay of a non-exempt employee and requires recalculation of the overtime for the period the bonus covers.

It came to my attention after a young Human Resources (HR) generalist, right out of college, told her employer, an international Fortune 500 company, which then called to ask me. How I never came across this issue in my first seven years of practice still amazes me. Incidentally, that young generalist has risen in the ranks over the years and is now an HR big shot with that company!

Well, the Department of Labor (DOL) issued an opinion letter on Jan. 7 regarding this very topic, and it occurred to me that there may be employers out there who are unaware of this, so I thought it best to inform them.

Let me explain the issue. A non-discretionary bonus is not what you think. It is not one etched in stone that the employer must pay. It is a bonus announced in advance that encourages employees to work harder, be more efficient and perform better. The employer can still retain discretion to pay it or not based on overall financials, for example.

Let’s look at an annual bonus. At year-end, once the bonus is paid to the nonexempt employee, the employer would need to divide the bonus by 52 to determine how much income is added to each week. This in turn affects the regular rate of pay of the nonexempt employee for each week, which then affects the calculations for any overtime worked each week. If the employee worked overtime during that year, the employer needs to pay the additional “half” time based on the new overtime calculations.

The new DOL opinion letter makes clear that the bonus can be spread between all of the weeks it covers when it can’t be attributed to any week in particular. I thought you might be interested, especially if you hadn’t heard of this before.

Incidentally, in case you missed it, minimum wage in Michigan jumped from $9.45 to $9.65 an hour effective on Jan 1. In addition, don’t forget that exempt employees must now be paid at the rate of not less than $684/week or $35,568/annually (and the highly compensated exempt employee not less than $107,432/annually). This is a great time to have your wage practices and job descriptions reviewed by an experienced employment attorney.

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