March 26, 2020
DOL Provides Fuzzy FLSA Answer
Does the value of a referral bonus have to be included in a non-exempt employee’s regular rate of pay for overtime calculations? For example, let’s say you offer of a $1,000 bonus to current employees who refer a candidate you subsequently hire. You pay your referring employee half on the day you hire the new employee and the other half when the referred employee has been with you for one year, assuming your employee is still employed at that time as well. During the year, the referring employee regularly works overtime, more than 40 hours in a workweek. The employee’s hourly rate of pay is $16.00. Do you have to add either of the $500 bonus payments to that employee’s hourly rate when you calculate overtime? If so, how?
On March 26th, the U.S. Department of Labor issued three opinion letters. One addressed this question. The good news for employers was that the answer was, “No” with regard to the first bonus payment. The answer was a qualified, “Maybe,” with regard to the second. Why?
The letter points out three reasons why the first bonus was excluded from the regular rate:
- All employees were eligible for the referral bonus so long as they did not work in HR and had no work responsibility for recruitment, hiring, or selection of new employees.
- Participation in the referral program was strictly voluntary.
- Participation did not take significant time and was limited to conversations as part of the employees’ social affairs outside of work hours.
The second bonus payment, however, like a longevity bonus because it required the employee to still be employed one year later. A longevity bonus may, likewise, be excluded from the regular rate of pay for overtime calculations if it is not:
- measured by hours worked, production or efficiency; or
- paid pursuant to a contract (so that the employee has a legal right to the payment and could bring suit to enforce it.
The Department noted that the first factor was met but it had insufficient information to determine if the employee had a legal right to the second payment that was “contractually enforceable.”
Practical application? The devil is in the detail. When drafting your employment policies and programs, be clear. Give yourself the flexibility you may want or need to avoid binding, contractual obligations that you did not otherwise intend.