As we get to the end of the year, management committees and corporate boards are in the process of approving year-end bonuses for employees.  A frequently overlooked wage and hour mistake is failing to include non-discretionary bonuses in the regular rate of pay for non-exempt employees.

In calculating the regular rate of pay on which employer’s must pay overtime, the employer must generally include all remuneration paid to the employer.  Excluded from the regular rate of pay are, among a few other things, discretionary bonuses, gifts, Christmas and special occasion bonuses.

Discretionary bonuses are those where the employer retains the discretion over the payment and amount of the bonus until a time near the end of the period over which the bonus is paid.  If the bonus is promised to employees or is made pursuant to an agreement or contract, the bonus is not discretionary and must be included in the regular rate of pay for overtime purposes.  Gifts, Christmas and special occasion bonuses are those bonuses that are paid as a reward for service and the amounts are not measured by or dependent on hours worked, production or efficiency.

If a year-end bonus is one that must be included in the regular rate of pay, the employer must pro-rate the bonus over the prior year when it was earned and then recalculate the overtime due to employees as a result of the higher regular rate of pay.  This rarely results in significant overtime adjustments but such payments are required, nonetheless, to be in full compliance with the law.

For example, if an employer pays a $2,000 year end, non-discretionary bonus to a non-exempt employee, the employer allocates 1/52 of the bonus into each workweek over the prior year (i.e., $38.46 per week).  Assuming an employee worked 50 hours in a workweek, the employer would have to recalculate the overtime that was due during that workweek based on the increase in earnings caused by the bonus payment. 

$38.46 ÷ 50 hours = $0.77 (increase in the regular rate)

$0.77 x ½ = $0.39 (increase in the additional half-time premium)

$0.39 x 10 hours of overtime worked = $3.90 (increase in overtime earnings due to the bonus)

The resulting additional overtime that would be required to be paid because of the $2,000 bonus payment is $3.90 for that workweek.

If you have questions about whether your year-end bonuses should be included in the regular rate of pay, be sure and call you labor and employment lawyer.  Or better yet, call me.

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