Most employers know that their “non-exempt” employees (e.g., employees who are not managers, professional personnel or who fit one of one of the other exemptions under the Fair Labor Standards Act “FLSA”) must be paid no less than the minimum wage prescribed by federal and/or California wage and hours laws. These employers also know that federal and state laws require an employer to pay non-exempt employees 1 ½ times (or sometimes double) their regular hourly rate as overtime pay – whether that overtime is measured by the day (more than eight hours) and/or by the week (more than forty hours).
However, as California wage and hour lawyers know, there are many nuances in the law on which many employers are not well versed. This articles speaks specifically to the FLSA: Bonuses and Calculating Overtime Pay.
ARE BONUSES INCLUDED IN AN EMPLOYEE’S “REGULAR RATE FOR OVERTIME PAY?”
Many employers pay bonuses to their employees, and may not realize that, under most circumstances, bonuses must be considered in calculating an employee’s “regular rate” of pay, which in turn affects the calculation of overtime compensation to which the employees are entitled for work over eight hours a day and/or forty hours a week. The following is a discussion of the rules applicable to bonuses under the FLSA and regulations promulgated under it.
The FLSA requires that, with specified exceptions, all compensation paid an employee must be included in the employee’s “regular rate” of pay. Excluded from the “regular rate” are bonuses “as to which both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement or promise causing the employee to expect such payment regularly.” FLSA sec. 7(e)(3)(a); 29 CFR sec. 778.211.
Consider this example: An employer announces to her employees at the beginning of the year that she will pay bonuses to employees who, in her estimation, perform services in an exemplary fashion. She does not tell the employees how much the bonuses will be, and in fact, has not yet determined how she will arrive at the amount of bonuses to be paid. When the bonuses are thereafter paid, they are not exempt and must be included in the employees’ “regular rate” for purposes of determining the hourly rate they are entitled to for purposes of overtime pay for the period during which the bonus applied. The reason these bonuses are not exempt is that the fact of payment is not within the discretion of the employer, even though the amount of the bonuses is within her discretion.
Consider another example: An employer informs his employees that he is considering paying them a bonus at the end of the year, but only if the company’s profits warrant it, and that he will determine in his own discretion whether the company’s profitability warrants the payment of bonuses. He further tells his employees that any bonuses paid will be computed on the basis of a specified formula, for instance, $1.00 for every widget produced by the employee. In this example also, the bonuses paid are not exempt from determination of the employee’s regular rate of pay for purposes of calculating overtime pay, because the amount of the bonus to be paid is not within the discretion of the employer, even though the fact of payment is within his discretion.
HOW IS AN EMPLOYEE’S “REGULAR RATE” CALCULATED IF SHE RECEIVES A BONUS THAT IS NOT EXCLUDED FROM WAGES?
When a bonus must be included in an employee’s “regular rate” of pay, how is the employee’s “regular rate” determined? The first question which must be answered is whether the period to which the bonus applies is known and specified. If it is, the amount of the bonus must be apportioned back over the work weeks of the period during which the bonus was earned.
For instance, if the employer makes it known that bonuses will be paid on an annual basis at the end of the year, the amount of an employee’s bonus must be apportioned among the work weeks during the year. The amount applicable to a particular week must then be added to the “regular rate” without consideration of the bonus to arrive at the new, higher “regular rate.” The applicable overtime multiplier (typically 1½, or 2 if double time is applicable) is then applied to the overtime hours worked in that week and the employer must pay the employee the difference between that amount and the lesser overtime amount the employer paid the employee at the end of the pay period for that week.
As an example, assume an employee earns $10 an hour and works 50 weeks in the year. Assume she is not provided with vacation time, but is told she may take whatever time off she wants so long as she gets his work done, and she takes two weeks off during the year. Thus, there are 50 work weeks during the year.
Assume the bonus the employee receives at the end of the year is $2,000. This $2,000 would be apportioned over the 50 work weeks, resulting in $40 being added to each work week. Assume further that in a particular week, the employee works 50 hours. For that 50 hours, the employee would have been paid $550, based on $10 for 40 hours ($400) plus 10 hours at $15 (1 ½ time) ($150) for a total of $550 for that week.
Since $40 is attributed to that week, the employee’s regular rate for that week is $440 ($400 + $40 = $440). This $440 is divided by the regular 40-hour work week to arrive at the employee’s “regular rate” for that week of $11 per hour. Thus, the employee is entitled to $16.50 for each hour of overtime worked during that week ($11 x 1 ½ = $16.50). Since the employee worked 10 hours’ overtime during that week, she is entitled to $165.00 ($16.50 x 10 = $165.00). Since the employee was initially paid $150 for those 10 overtime hours, she is now entitled to be paid an additional $15 for those overtime hours as overtime pay ($165 – $150 = $15).
This type of calculation would be made for every week during which the employee worked overtime to arrive at the additional amount of overtime pay to which she would be entitled.
If the bonus earnings cannot reasonably be identified with particular work weeks, the regulations promulgated under the FLSA provides the following guidance for determining how to calculate the employee’s regular rate:
[I]f there are facts which make it inappropriate to assume equal bonus earnings for each workweek, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each hour of the pay period and the resulting hourly increase may be determined by dividing the total bonus by the number of hours worked by the employee during the period for which it is paid. The additional compensation due for the overtime work weeks in the period may then be computed by multiplying the total number of statutory overtime hours worked in each such workweek during the period by one half this hourly increase.
29 CFR sec. 778.209(b).
In this example, the same type of calculation as that above is made, but is made based on the number of hours worked instead of the number of weeks worked for purposes of calculating overtime pay.
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The field of employment law is quite complex, and there are many issues not listed here which relate to federal and California wage and hour laws specifically, such as the requirement for meal breaks, rest periods, and child labor limitations. Whether you are an employee or an employer, engaging the services of an employment attorney is an excellent way to navigate the maze of federal and California labor laws. Employment attorneys advise employers on their legal requirements to help them avoid potential fines or lawsuits as well as advising and representing employees on their rights and recourse should those rights be violated. Should litigation ensue, the employment law attorney can represent the clients in court or before the California labor board.
More information about bonuses and gifts can be found at williamjtuckerlaw.com.