With many employers considering whether and when to pay end-of-year or holiday bonuses, I thought it was a good time to review the rules for when bonuses or other compensation must be included in the regular rate of pay for purposes of paying overtime.  This is one issue that still trips up Texas employers.

Nonexempt employees are entitled to overtime compensation at 1.5 times the regular rate of pay for most hours worked in excess of 40 per week.  In determining the regular rate of pay an employer is to include all compensation paid to an employee unless it falls into one of nine general statutory exclusions.  Many end-of-year holiday bonuses will  fall into a statutory exclusion.  However, where the bonus is dependent on hours worked, productivity or efficiency, the bonus should be included in the regular rate of pay for nonexempt employees. 

Assume an employee receives a $5,200 end-of-year bonus that should be included in the regular rate of pay.  Presumably, that bonus was earned in equal portions over the course of the year despite the fact that it is paid in one workweek at the end of the year.  One hundred dollars of the bonus will be attributed to each workweek in the year.  If an employee worked overtime in a workweek, $100 of the end of year bonus has not been included in the wages for that week for purposes of determining the proper overtime rate.  Consequently, the employer must go back and recalculate the overtime pay for the week to make-up the fractional underpayment.  These underpayments are usually small, but they provide an employer with potential overtime exposure and the costs of defending such a claim normally far exceed the unpaid overtime.  

The takeaway from this post is to remember that if an employer is making a bonus or other payment that is not specifically excluded from the regular rate of pay, the employer may need to go back and make overtime adjustment payments to nonexempt employees for the pay periods over which the overtime was earned and in which the employees worked overtime.  This can be complex to perform and is beyond the scope of this post but a labor and employment attorney Board Certified by the Texas Board of Legal Specialization can help you calculate this overtime adjustment.

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