Bonuses and the FLSA
By: Hillary Schwanbeck, HR Senior Generalist
May 15, 2011
True or False: Bonuses paid to employees for meeting quotas or production goals are simply bonuses and will not affect an employee’s regular rate of pay.
If you answered True, you may be out of compliance with the Fair Labor Standards Act.
The Fair Labor Standards Act
The Fair Labor Standards Act (FLSA) was enacted in 1938 in order to protect workers from overwork and underpay. It established minimum wage, youth employment standards, recordkeeping requirements and overtime requirements. The overtime provisions state that a non-exempt employee (not exempt from the provisions of the FLSA) must be paid at least one and one-half times their regular rate of pay (also referred to as time and a half) for any hours worked beyond 40 in the standard workweek*. The FLSA covers all private employers and most public employers. There are special working hour restrictions for youth workers, but workers older than 16 have no limit on the number of hours they can work in any workweek.
The Standard Workweek and Regular Rate of Pay
The standard workweek, as defined by the FLSA, is a “fixed and regularly recurring period of 168 hours”1, which is the equivalent of 7 consecutive 24-hour periods. The workweek does not have to line up with the calendar week and employers may establish different workweeks for different positions.
The regular rate of pay for an employee must be at least the established federal or state minimum wage, (Federal is set at $7.25/hour as of July 24, 2009 and there is an exception for qualifying tipped employees). The regular rate of pay for an employee includes all remuneration or payments for time worked and employment such as regular wages, non-cash wages (like housing/boarding, goods, etc.), non-overtime premium payments (like hazard pay, shift differentials, on-call pay etc.), and non-discretionary bonuses. Certain payments to employees may be excluded from the regular rate of pay calculation; those include payments or reimbursement for expenses, premium payments for overtime work, holiday work, or weekend work, gifts for special occasions, payments for time not worked (such as vacation, sick, or holiday pay), and discretionary bonuses.
The Difference between Non-Discretionary and Discretionary Bonuses
Non-discretionary bonuses are those that are promised to employees if they meet certain goals or to induce them to work more efficiently or steadily. Non-discretionary bonuses are typically announced in advanced and certain standards must be met in order for the bonus to be awarded. Non-discretionary bonuses include incentives or payments given for meeting a production goal, sales quota, profit number or attendance goal or an expected annual bonus, such as an annual Christmas or yearend bonus.
Discretionary bonuses are neither promised nor expected and are not tied to specific goal – they are given at the discretion of the management on an individual basis. In order for a bonus to be purely discretionary, it should not be announced in advanced and the reason for awarding the bonus should be decided after the fact by the employer, not because a certain set standard was met.2 Discretionary bonuses should not motivate employees to work harder or more steadily because they should not be expected by the employees.
Many employers forgo including non-discretionary bonus amounts in the regular rate of pay for overtime purposes. Regardless of whether the omission was intentional or unintentional, the law requires that the amount be included. Another important fact to keep in mind is that non-discretionary bonuses must only be added into the regular rate of pay for all hours that the employee worked during the period that the bonus was meant to cover. Annual bonuses that cover a year’s worth of performance must be added to the regular rate of pay for the entire year; quarterly bonus must be added to the regular rate of pay for the applicable quarter, and so forth.
Consequences for Non-Compliance with the FLSA Overtime Provisions
The Department of Labor (DOL) is the enforcer of the FLSA, and does not typically take it easy on employers who violate its provisions. The DOL intent in enforcing the overtime provisions FLSA is to ensure that employees are paid the wages and overtime they are legally owed. Not knowing or fully understanding the FLSA is not a valid excuse for underpayment.
The most obvious and least hefty consequence of violating the overtime provision of the FLSA is back payment of wages (2 years worth, normally). The DOL can also bring fines or civil penalties against the employer or seek damages by bringing a suit against the employer. Finally, the DOL can require an employer to change it practices through the use of an injunction. The extent to which the DOL will punish an employer depends on the severity of the infraction and whether or not the FLSA was willfully violated.
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