Many retailers use bonus programs to incentivize employee performance. With respect to bonuses paid to non-exempt employees (i.e., those employees who are entitled to overtime under the Fair Labor Standards Act), the retailer must then determine whether it owes additional overtime on the incentive bonus.
On July 1, 2019, the U.S. Department of Labor (“DOL”) issued an opinion letter providing additional guidance on the circumstances under which employers must pay additional overtime on performance-based bonuses. The opinion letter serves as a reminder to employers of this often-overlooked, but nonetheless important, obligation.
The first step in calculating an employee’s overtime pay is to determine the employee’s “regular rate” of pay. An employee’s regular rate includes more than just the employee’s “straight time” or hourly wages. Rather, under Section 207(e) of the FLSA, an employee’s regular rate includes all remuneration paid to an employee, unless it meets one of eight specific exclusions.
In the bonus context, the relevant exclusion is Section 207(e)(3)’s exclusion for discretionary bonuses. The term “discretionary bonus” is a bit of a misnomer, however. In order to be a discretionary bonus excludable from the regular rate calculation, both the fact and the amount of the bonus payment must be determined at the employer’s sole discretion at or near the end of the period and not pursuant to any contract, agreement, or promise causing the employee to expect such payments regularly. The most commonly awarded bonuses in the retail context — bonuses for meeting or exceeding sales or revenue targets, for attendance, or for safety compliance — often constitute “non-discretionary” bonuses. If so, these bonuses must be included in the regular rate calculation, which means that the employer must pay additional overtime on these bonuses.
Calculating the overtime amount due on bonuses that are paid on a non-weekly basis, such as monthly, quarterly, or annual bonuses, can be challenging. The regulations make clear that an employer may “disregard the bonus in computing the regular rate [each week] until such time as the amount of the bonus can be ascertained.” 29 C.F.R. § 778.209(a). But once the amount of the bonus is ascertained, the regulations make clear that the employer must determine whether it must retroactively recalculate the regular rate for each workweek covered by the bonus period and pay additional overtime. The DOL’s new opinion letter attempts to provide guidance on this analysis.
As explained in the DOL opinion letter, whether the employer must recalculate the regular rate and pay additional overtime on a non-discretionary bonus depends on the manner in which the bonus is calculated. If the bonus is calculated as a fixed percentage of the employee’s total remuneration inclusive of overtime compensation (e.g., 15% bonus on the employee’s straight time and overtime wages), then the employer does not need to retroactively calculate the regular rate and pay additional overtime because the bonus already includes overtime compensation.
If, however, the bonus does not take into account the amount of overtime already paid to the employee (e.g., a 10% bonus on the employee’s base salary or $50 lump-sum amount), then the employer must retroactively recalculate the regular rate for each workweek over the bonus period and pay additional overtime compensation for each week during the bonus period that the employee worked overtime. This can be a tedious, time-consuming process for employers, and though the incremental overtime payment owed may be small on an employee-by-employee basis, any unpaid amounts can quickly add up across all employees over a two or three year statutory period.