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Does your organization properly pay overtime on bonus payouts to non-exempt/hourly employees?

March 3, 2017

By Michael Burns, courtesy of SBAM Approved Partner ASE

As the “books” close on 2016, final incentive plan/bonus payments are being made to eligible employees in many organizations. Today variable pay in the form of incentive pay and bonuses is not just for executives. ASE’s 2016/17 Salary Budget Survey results show that almost 50% of employers have an annual bonus for non-union hourly employees and 45% of employers have an annual bonus for salaried non-exempt employees as one form of variable pay. And this is just one type of several kinds of variable pay programs employers use to incentivize employees to work harder, smarter and faster. ASE’s Salary Budget Survey found that 83% of employers have some sort of variable pay program in place and many extend beyond the traditional exempt management/executive levels.

Employers offering variable pay programs to non-exempt employees must be careful that the plan is administered in compliance with the Fair Labor Standards Act (FLSA). If the plan pays out if certain quantitative goals are met, this plan is probably a non-discretionary plan.  Wage and hour law requires the employer to pay overtime to those hourly/non-exempt employees and include the bonus on top of the regular rate of pay.  In other words, calculate the regular rate of pay with the bonus pay included and then calculate the time and one-half overtime premium onto this new rate. 

The calculation of overtime includes any non-discretionary bonus paid in a time period where overtime was worked and time and one-half pay is required by the FLSA.

On the other hand, if the bonus payout method is not tied to a quantifiable sum the bonus plan is most likely discretionary. A discretionary bonus or incentive pay is not subject to the FLSA overtime pay requirements.  What types of plans are we talking about here? Spot awards, employee referral awards, sign on bonuses, attendance bonuses, etc. Any incentive where there is not a guaranteed payment but the award of the incentive is at the discretion of the employer. 

Discretionary bonuses are defined by law as payment in which “the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement . . . If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it.”

An article in a recent Jackson Lewis blog by Sean Shahabi states “Ultimately, employers who pay bonuses and other forms of ‘supplemental’ compensation to non-exempt employees should be cognizant of the potential requirement to pay overtime premiums on these payments and should consider seeking legal guidance in connection with their bonus programs. The need for proper guidance is especially important due to the class, collective, and/or representative action risks presented by violating this aspect of the law.”

ASE offers classes to HR professionals and managers to hone their FLSA knowledge and skills in these technical areas of wage and hour compliance. ASE’s Members Only Virtual Library provides extensive information on both Variable Pay Compensation and FLSA compliance. 

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