When Should Bonuses Be Used In Calculating Overtime?

The item that employers miss the most when calculating overtime wages is the inclusion of non-discretionary bonuses.  The FLSA requires that non-discretionary bonuses – these are promised to the employee – be included and allocated over the time period they apply and included in calculating overtime pay for non-exempt employees.

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These bonuses increase the overtime pay beyond the employee’s regular overtime pay rate, which is one and one-half times their regular hourly rate of pay.  Non-discretionary bonuses that are not paid weekly require allocation to each workweek covered by the bonus before recalculating the overtime compensation due.

Generally, non-discretionary bonuses include attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, and retention bonus.

To calculate the overtime due for a week covered by a bonus, the employer must first calculate the effective average rate of pay for the week including the impact of the bonus.  To do so, the employer adds the bonus paid to the total pay for the week and divides the sum by the total hours worked.  That number is multiplied by 1.5 to calculate the overtime due.

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In order for a bonus to not be included in the overtime calculation it must be completely discretionary.  In order to qualify as a discretionary bonus under the FLSA, the following requirements must be met.

  • The employer must retain discretion as to the fact that the bonus will be paid.
  • The employer must retain discretion as to the amount of the bonus payment.
  • Discretion must be retained until a time quite close to the end of the period for which the bonus is paid.
  • The bonus payment must not be made pursuant to any prior contract, agreement or promise, causing the employees to expect such payments regularly.

In simple terms, the employer must maintain complete discretion over the bonus.  They cannot announce at the beginning of the year that a year-end bonus will be paid or promise a bonus based on items sold or produced.

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If need help determining if your bonus system is non-discretionary, please give our firm a call.

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