Bonuses and Wages

Bonuses sometimes counted in calculating overtime pay

XYZ Company is in trouble. The company reported another month of
declining profits. The board of directors is growing frustrated and the
president is afraid to answer his telephone.
In a last-ditch effort to sell more widgets, the president pitches an
offer to an account he's long sought. But there's a catch: To close the
deal, the president promised XYZ would deliver the widgets within a week
when it normally takes two weeks to make that many widgets.
The president holds a meeting at which he explains to employees the
predicament XYZ faces: produce the widgets in record time or the company
will close. As an incentive, the president promises the widget makers a
$500 bonus each if they complete the order on time.
Hearing this promise, employees work massive overtime hours and complete
the order. As promised, the company pays everyone a $500 bonus. But now,
employees claim they're owed more overtime because the bonus increased
their overtime rate of pay for the week. Can this be?
It sure can!
Under the Fair Labor Standards Act, an employee is entitled to receive
11/2 times their regular hourly rate for all hours worked over 40 in a
workweek. But an employee's regular rate is not simply the employee's
hourly rate. Instead, the FLSA requires that employers compute the
"regular rate" by dividing the total compensation received in a workweek
(not including overtime premiums) by the total number of hours worked
that workweek.
If a bonus is entirely discretionary - an unpromised Christmas bonus,
for example - then the amount can be excluded from an employee's regular
pay rate. But bonuses that are announced to employees to induce them to
work more steadily, rapidly or efficiently or to remain with the firm
are considered part of the regular rate of pay. In those situations, a
bonus must be apportioned back over the workweeks of the period during
which it was earned, resulting in adjustment of the regular rate and
payment of additional overtime in accordance with the adjusted regular
rate of pay.
In the case of XYZ Company, assume the employees are all paid $10 an
hour and worked 70 hours during the workweek in question. Under those
circumstances, regulations would require XYZ to pay each employee an
additional $107.10. Dividing the $500 by 70 hours results in an
additional $7.14 in pay per hour. Multiplying $7.14 by 30 hours of
overtime and then multiplying again by 0.5 for the added overtime pay
rate comes to $107.10.
Other compensation paid to employees also could qualify as a
nondiscretionary bonus.
In one case, the court decided lump-sum payments for unused sick time
constituted a non-discretionary bonus that must be added to the regular
rate of pay in computing overtime. The court based its decision on its
determination the buy-back is remuneration for services rendered and
that one clear purpose of the plan is to encourage regular attendance.
The buy-back program retroactively pays more money to those employees
who work steadily  because their services are more valuable than those
of employees who regularly use sick leave time. The court concluded the
payments are for work already done and, therefore, qualify as
remuneration.
On the other hand, discretionary gifts from a company don't have to be
included as part of an employee's regular rate. So, if the company makes
no promise, but on April 2 the president wakes up in a good mood and
passes out $100 bills to everyone at the plant, the regular rate of pay
and overtime premium isn't affected. The president can even call it a
"bonus" and still not affect the overtime premium because it was
discretionary.
Employers should review all bonuses provided to their employees to
determine if the bonus is promised in advance as an incentive for
employees to work harder or more efficiently or to work more reliably or
stay longer. In those situations, the employer could owe more overtime
compensation for the period covered by the bonus.

Michael Santo is a partner in Bechtel & Santo, a Grand Junction law firm
that emphasizes employment law services for businesses. Santo also
belongs to the Western Colorado Human Resource Association. For more
information about the WCHRA, log on to www.wchra.org.