Paying a bonus to your employees can have a hidden cost

Mike Staebell, Iowa Wage & Hour Watch, Iowa Employment & Labor Law, Dickinson Law Firm, Des Moines Iowa

Posted on 03/21/2017 at 12:28 PM by Mike Staebell

Have you paid out a year-end bonus to your employees? If so, did you consider the effect the bonus had on overtime pay that to which non-exempt employees are entitled under the Fair Labor Standards Act (FLSA)?    

An often-overlooked section of the FLSA states that a bonus paid pursuant to any prior contract, agreement or promise is called “non-discretionary”. If an employer promises in advance to pay the bonus, the employer has abandoned any discretion with regard to the bonus and it becomes non-discretionary. That payment must be factored into non-exempt employees’ overtime pay calculations for the period of time covered by the bonus. This is true even if the bonus is paid long after the overtime was worked, as is the case with a year-end productivity or profitability bonus. DOL regulations also state that discretionary bonus payments need not be included in overtime calculations for non-exempt employees.    

What’s an employer to do if the non-discretionary bonus was not factored in to overtime pay for non-exempt employees? First, get that situation fixed as soon as possible to limit liability! In order to comply with the FLSA, employers must retroactively determine how much the bonus raised the employee’s hourly rate of pay, then recalculate and pay the additional overtime pay due. It may sound simple, but it can be a pain. I’ve found that many employers don’t calculate this overtime catch-up pay correctly, if they do it at all. That can result in overpaying or underpaying when you’re just trying to do the right thing. I recommend you have an expert review your calculations to be sure you’re on the money. Feel free to contact me.

There is a way to avoid these retroactive bonus-driven overtime payments in future years. A lawful option is available that allows employers to avoid the recalculation and payment of additional overtime. The FLSA overtime regulations allow employers to pay a bonus as a percentage of the employee’s gross pay for the period covered by the bonus without having to refigure and pay additional overtime — as long as the percentage is based on the employee’s total straight time and overtime pay for the period covered. This method of figuring bonuses eliminates the requirement to retroactively recompute the overtime due to non-exempt employees as a result of the bonus.  

Lest you think omitting the bonus from the overtime pay calculation is no big deal, think again. It is very easy for employees to file a complaint with the DOL, which will trigger a Wage and Hour investigation of your organization. The results of that investigation may require the employer to cough up back pay, with an equal amount in liquidated damages, and potential civil money penalties. If the employee or employees file a private lawsuit, you can add court costs and attorney fees to that bill. It pays to be in compliance!

I’ll cover how to distinguish between discretionary and non-discretionary bonuses in a follow-up blog. For now, it’s enough to say that most employers think their bonus programs are discretionary and not subject to additional overtime pay for non-exempt employees. As a former long-time Department of Labor insider, my experience is that most bonuses are non-discretionary and require additional overtime pay to non-exempt employees. I’ll get into that in more detail in my next article. Check it out!

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.

- Mike Staebell 


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