Know the Legal Implications of Employee Overtime Pay and Bonuses
With the labor market becoming more competitive every day amidst the “Great Resignation”, finding and retaining top talent has never been more important. Many employers have turned to creative benefits in order to do so, such as paying out regular bonuses and incentivizing attendance. While employers may be trying to do right by their employees by offering such incentives, there may be unintended consequences that expose employers to liability under the Fair Labor Standards Act (“FLSA”).
Exempt and Nonexempt Employees
Broadly speaking, employees are divided into two categories under the FLSA: exempt and nonexempt. One of the most significant differences between the two is eligibility for overtime pay. Employers are required to pay nonexempt workers for any hours worked over 40 in a workweek at a rate not less than time and one-half their regular rate of pay. Exempt employees, on the other hand, are not required to be paid overtime, although certain salary and job duties criteria must be met.
It is of utmost importance for employers to carefully review and follow FLSA and Department of Labor (“DOL”) regulations governing whether an employee is exempt from overtime because misclassifying workers can have serious financial repercussions, including liquidated damages, back pay, attorney’s fees, and more. An employee is not exempt from the FLSA’s overtime requirements simply because s/he is paid a salary. Whether an employee is truly exempt requires a fact-specific and detailed inquiry. Titles and job descriptions are not determinative. If a salaried employee does not fit the criteria of one of the exemptions, s/he must be paid overtime.
Overtime Calculations and Bonuses
Many employers pay out bonuses to attract new hires and reward employees for their hard work. Bonuses can be considered discretionary or nondiscretionary. For purposes of calculating overtime pay, nondiscretionary bonuses must be included in a nonexempt employee’s regular rate of pay. Nondiscretionary bonuses include those that are announced to employees to encourage them to work more steadily, rapidly or efficiently, and bonuses designed to encourage employees to remain with a company.
Many employers fail to factor in nondiscretionary bonuses when calculating the amount of overtime pay owed to nonexempt employees. When an employee works overtime during the period covered by a nondiscretionary bonus, the employer is required to pay additional overtime pay based on the amount of the nondiscretionary bonus.
The DOL has stated that a bonus is discretionary if it meets the following criteria: 1) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus; 2) the employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and 3) the bonus is not paid according to any prior contract, agreement, or promise causing an employee to expect such payments regularly. If the bonus fails any part of this test, it is nondiscretionary and must be included in the overtime calculation.
Some bonuses that are commonly used by employers include sign-on, referral, and attendance bonuses. Each bonus requires careful consideration as to whether it is nondiscretionary.
Sign-on – Sign-on bonuses have become a common way of enticing employees to join a company. A sign-on bonus can be excluded from overtime unless it is paid pursuant to a collective bargaining agreement, ordinance, or policy with a “clawback” provision (requiring an employee to stay with the company for a certain period of time or else pay all or a portion of the bonus back to the company), it is not excludable and must be included in the overtime calculation.
Referral – Another common way to attract new candidates is to incentivize your existing workforce to recommend new employees from their own social circles. Referral bonuses can be discretionary and therefore excluded from an employee’s regular rate of pay if they are paid to employees who are not primarily engaged in recruiting activities and if all of the following conditions are met: 1) participation is strictly voluntary; 2) recruitment efforts do not involve significant time; and 3) the activity is limited to after-hours solicitation done only among friends, relatives, neighbors, and acquaintances as part of the employee’s social affairs. If a referral bonus meets these criteria, it is likely excludable from the overtime calculation.
Attendance – Attendance bonuses are a surefire way to incentivize your workforce to come to work on time every day. However, these bonuses, too, can cause potential FLSA violations if not handled properly. Attendance bonuses are generally considered nondiscretionary and must be included in the overtime calculation. There are strategies that could cause an attendance bonus to be discretionary, but these must be carefully crafted to ensure that they are actually at the discretion of the employer and thus excludable from the overtime calculation.
Conclusion
Bonuses are a great way to reward current hardworking employees and attract new talent in this ultra-competitive labor market. The exempt or nonexempt status of an employee, as well as the nature of the bonus, will play a pivotal role in deciding if and how those bonuses are to be factored into employees’ overtime calculations. Even innocent and unintentional mistakes involving misclassification of employees and failure to pay overtime can result in costly penalties and legal headaches, so it is vital to ensure that employees are properly classified as exempt or nonexempt and that any nondiscretionary bonuses are appropriately factored into an employee’s regular rate of pay for purposes of overtime calculations.
If you have any questions regarding your bonus policies or any other overtime issues, please reach out to one of the Labor and Employment Law attorneys at FGKS Law.
Original Publish Date: March 8, 2022
