Q&A – Non-Discretionary Bonuses – include them in OT?

June 3, 2013


Non-Discretionary Bonuses for OT

Q:  I heard that we have to include overtime in our bonuses payments for nonexempt employees.  Is this true?A:  Yes, this is true if the bonus is a non-discretionary bonus in accordance with the federal definition contained in the Fair Labor Standards Act (FLSA).A non-discretionary bonus is one that is governed by a policy or is based on performance.  Generally, the incentive is considered non-discretionary if the employer sets the standards that are required to receive a bonus based on meeting job or assignment-specific criteria. Some examples of non-discretionary bonuses are incentive plans, commission plans, shift differentials, productivity bonuses and attendance bonuses.Conversely, elective bonuses are those that are provided completely at the discretion of the employer at irregular intervals.  The employee generally has no expectation of receiving such a bonus.  For a bonus to be considered discretionary, the incentive amount, its eligibility requirements, as well as its timing are not disclosed in advance, as they generally are not known.  Some good examples of discretionary bonuses are a holiday bonus or a one-time bonus for an employee in recognition of exceptional job performance.Non-discretionary bonus amounts must be included in the calculation of the regular rate for overtime compensation purposes.  However, it is important to note that it must be included in the regular rate for each pay period in which the bonus was based, not on the pay period in which the bonus is paid.  For example, for a quarterly attendance bonus, when the bonus amount is ascertained, the employer is required to recalculate the regular rate for each workweek in the bonus period and pay additional overtime.  The recalculation of the regular rate for overtime purposes is only required for workweeks in the bonus period in which the employee received overtime pay. Here is a sample calculation:

Tommy (an hourly, nonexempt employee) earns a quarterly attendance bonus of $200.  During that quarter, Tommy worked 480 straight time hours and 200 overtime hours in total.  The bonus causes Tommy’s regular rate to increase by $.29/hour ($200 bonus divided by 680 total hours).  For every overtime hour Tommy has worked during the quarter, he must be paid an additional 14.5 cents (half time rate).  The portion that must be added to the bonus to account for overtime is $29 (200 overtime hours x 14.5 cents).  Therefore his bonus including the overtime premium becomes $229.

This is an area of the law that many employers fail to understand and consequently fail to compensate employees correctly.  Should you have questions regarding such calculations, please contact your Human Resources Professional.