Bonus and Incentive Pay

A new “hot button” in the realm of Wage and Hour is the category of Bonus and Incentive pay.

You may not be aware that overtime must be calculated at the employee’s “regular rate of pay” but that the rate may fluctuate based on several different factors. One of the factors is receiving a non-discretionary bonus. This includes production bonuses, incentives for sales or production or any other bonus or incentive that the employee is expecting.

This means if you offer a quarterly production bonus, you have to go back and re-calculate any overtime earned during the last quarter and pay the difference between the amount earned at the time and the adjusted amount based on the bonus.

Here’s an example:
You have an employee who is paid an hourly rate of $10.00. The employer has promised the employee a monthly bonus of $50. The employee works 40 hours per week and, in June, works 160 hours total.  Because the non-discretionary bonus of $50 must be added into the employee’s regular rate of pay to determine overtime. So, the $50 is divided by the 160 hours worked in June to equal $0.31 cents per hour.
This makes the employee’s regular rate of pay for June $10.31. and the overtime rate would be 1.5 x $10.31 = $15.47.

The challenge comes when you have a quarterly or annual bonus/incentive where you have to go back through all the records and re-calculate any overtime payments.

And, be careful with regular, reoccurring discretionary bonuses….over time, these can become expected and treated as non-discretionary.

If your bonus is a discretionary one, make sure you clearly state that they are in the sole discretion of the employer.

Best Practices:
Implement written bonus policies which clearly distinguish between discretionary and non-discretionary bonuses.

Ensure that the payroll department/provider understands the rules for calculating the regular rate of pay for purposes of paying overtime and if you have a provider, make sure they know what bonuses are being paid and why.

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