Be careful issuing bonuses to nonexempt workers who keep working during the COVID-19 pandemic
Friday, May 01, 2020
Employers who are working hard to stay open during the COVID-19 pandemic are looking for innovative ways to reward and recognize employees who are going “the extra mile” and continuing to work despite the invisible threat of the virus to their safety.
Employers who choose to use special bonuses or other lump sum payments need to be aware that bonus payments should be included in the calculations for determining how much overtime is due to nonexempt employees.
Discretionary Bonuses Meeting Specific Criteria Can Be Excluded From The Regular Rate
Discretionary bonuses are excludable from the regular rate of pay for nonexempt workers. But, a bonus is “discretionary” only if it meets all of the very specific statutory requirements, which are:
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 and to determine the amount of the bonus and;the bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly. Employer has the sole discretion.
A bonus that meets these strict criteria is not required to be included in overtime compensation for a nonexempt employee.
Nondiscretionary Bonuses Generally Must Be Included In The “Regular Rate”
A bonus that fails to meet the above criteria must be included in the regular rate of pay (unless it is subject to another exemption or exclusion). Therefore, it is safe to assume that most bonus payments should be included in a nonexempt employee’s “regular rate” of pay, which is used to correctly calculate the overtime premium due if the employee works more than 40 hours in one or more workweeks during the bonus measurement period.
Nondiscretionary bonuses may include:
- Bonuses based on a predetermined formula, such as production bonuses;
- Bonuses for quality or accuracy of work;
- Bonuses announced to employees to induce them to work;
- Attendance bonuses; and
- Safety bonuses.
Here’s An Example of How It Works
Assume that a bonus program pays employees a $500 bonus for working 90% of his/her scheduled hours over a four-week period during the pandemic. Assume that a nonexempt, hourly paid employee meets the 90% threshold during the applicable four-week measurement period.
Assume further that, during this period, the employee worked 42 hours in one of the workweeks, 50 hours in another one, and 40 hours in the other two weeks. Assume also that the employee already received his/her proper overtime wages due at his hourly rate for the two overtime workweeks.
The employee’s total bonus-related payment would be calculated as follows:
- The employee is due the base $500 bonus for meeting the standard.
- But, the employee is also due to be paid overtime on the bonus for the additional overtime hours the employee worked in the two weeks of 40 or more hours worked; as follows:
- First, divide the bonus ($500) by the number of weeks (4) it covered, so the workweek-equivalent bonus is $125 ($500 bonus divided by 4 workweeks = $125);
- Second, divide the $125 workweek equivalent bonus by the number of hours worked in the two weeks in which the employee worked overtime;
- The overtime premium due for the 42-hour week is $2.98 ($125 divided by 42 hours times .5 times 2 OT hours = $2.98);
- The overtime premium due for the 50-hour week is $12.50 ($125 divided by 50 hours times .5 times 10 OT hours = $12.50);
- Then, add the $500 base bonus to the additional overtime premiums of $2.98 and $12.50 to get a total adjusted payment due of $515.48.
Because the employee has already been paid the proper overtime compensation on his hourly based wages, you would need only figure the overtime premium due on the bonus itself. In other words, the overtime premium is calculated at one-half of the employee’s regular rate because the base bonus represents the “one” of “one and one-half.”
Easier Alternatives to This Long-Hand Calculation for Every Employee
Most employers find the manual, long-hand regular rate calculation above to be complicated and time consuming. Some employers choose to forego the flat bonus altogether and try to recognize and reward employees just by increasing the employee’s hourly pay for each hour worked.
This additional pay is like a shift differential and may even be called “hazardous duty pay.” We have even heard it referred to as “hero pay” during the pandemic. Overtime under this method is calculated in the normal way that one would calculate overtime on a straight hourly wage.
Employers who like the idea of a flat rate or lump-sum bonus and are willing to do some arithmetic can use a percentage bonus to comply with the FLSA. Using a percentage method takes into account all of the time and pay that an employee received during the relevant period and is therefore lawful.
Assume that an employer uses the “percentage bonus” method and gives employees an extra 10% bonus for weeks during the pandemic. In this example, assume that a nonexempt employee, who is paid $15 per hour works the same hours of work as the employee in the above example.
That employee would be paid $825, $645, $600 and $600 for those four weeks of work in total regular and overtime wages. Multiply those weeks’ pay by 10% and the respective bonus for each week would be $82.50, $64.50, and $60 for the other two weeks. These bonus payments already take into account the overtime pay paid to the employee and no additional calculations are necessary to comply with the FLSA.
The percentage method can have other variations. For example, assume that the employer sets the bonus at 1% if the employee worked between 120 and 160 hours during the relevant period and 2% if the employee worked more than 160 hours during the relevant period. This method would also take into account overtime that had already been paid and also be a lawful method under the FLSA.
Finally, yet another method exists if you still want more creativity. In this case, you may want to consider an attendance lottery program. Under such a program, employees who meet the requisite standard can be entered into a lottery with a winner determined by a drawing. The U.S. Department of Labor (USDOL) wrote in an opinion letter that bonuses paid pursuant to a lottery of this type may be excluded from the regular rate calculation.
It should be noted, however, that the USDOL reached this conclusion because the odds of winning the bonus were “very small.” It is possible that the USDOL and a court might reach a different conclusion if the odds of winning more favorable.
The main point to consider here is that when evaluating ways to recognize and reward employees who work during the pandemic, you must ensure that your bonus plan complies with the FLSA, as well as any other applicable federal, state, and local laws.
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