November 23, 2022

Another Bonus Bites Back

Last month it was a story about year-end bonuses. This time it is about incentive pay or production bonuses. A manufacturer’s non-exempt employees frequently worked over 40 hours per week, averaging between 40 and 60 hours per week. 

The employer provided those employees with bonuses as “an incentive for hard work.”  The allegation is the employer failed to include the bonuses in the employees’ regular rate of pay for purposes of calculating their overtime compensation, and “denied significant amounts of overtime compensation.”

As of this writing, this class-action lawsuit has not yet been heard by the court.  If the facts are as alleged, I venture to say it appears the employer failed to comply with the Fair Labor Standards Act.  A non-discretionary bonus must be included in a non-exempt employee’s regular rate of pay for overtime calculations.  A non-discretionary bonus may be a misnomer. It is not based on your ability to discontinue the bonus program at your discretion. It generally refers to a bonus that is announced in advance, for the purpose of changing behavior, and upon which an employee performs some work in reliance upon your announcement.

For example, you tell me that if I work an extra 8-hour shift you will pay me an additional $2 per hour. I say “OK” and work that shift to earn the extra money.  I end up working 48 hours that week. My hourly rate of pay is usually $12. The hourly rate of pay for the extra shift was $14. My regular rate of pay for that work week is $12.33 ((40 x $12) + (8 x $14)/48). That is the rate on which my overtime must be based.

Tips. Be proactive. If you use a payroll vendor, ask them how their system calculates overtime when you pay non-discretionary bonuses to your non-exempt employees. Make a record of their response. In the interim check out the DOL’s related Fact Sheet #56C.