A chronic challenge is ensuring you and your payroll company calculate compensation correctly, especially for non-exempt employees.
Companies run into sometimes-difficult hurdles when non-exempt, also known as hourly, employees work more than 40 hours in a workweek and if they receive certain kinds of bonuses.
Overtime Pay Calculation
According to the federal Fair Labor Standards Act (FLSA) overtime pay must be given to every non-exempt employee who works over 40 hours in a given workweek.
For every hour exceeding 40 hours an employee spends working in a single week, her employer must compensate her one and a half times her regular rate of pay. So, for example, if a worker earns $20 per hour and works 43 hours in a week, she’s entitled to $20 for each of the first 40 hours and $30 per hour for the next three hours for a gross total pay of $890.
Generally speaking, it doesn’t matter how you calculate your week so long as it’s seven days. For example, your workweek can be Monday through Sunday, Sunday through Saturday, or even Wednesday through Tuesday. Just be consistent.
Consequences of Bi-Weekly Paychecks
The FLSA doesn’t calculate overtime pay based on the pay period, but rather the work week. This is best understood through an example.
Assume your worker is non-exempt, and she’s paid bi-weekly. Now assume she worked 34 hours during week #1 and 43 hours in week #2. Those are the two weeks covered by this particular pay period.
Do you have to pay her an overtime rate?
Yes, you do. An employer must compensate the employee for the three hours of overtime she worked in the second week of the pay period. An employer cannot use the 6 hours not worked (that is, 40 hours – 34 hours worked in week #1) to carry over into the second week of the pay period and avoid paying the employee overtime during week #2.
So in our example, for this two-week pay period, she’s earned 74 hours of straight-time pay and 3 hours of overtime pay.
How Bonuses Affect Overtime Rates
As we know, a bonus is – in general – a payment made to an employee in addition to her regular earnings.
Discretionary bonuses don’t impact the overtime rate an employer must pay an employee. However, non-discretionary bonuses must be factored into the employee’s regular rate and therefore, the overtime pay calculation almost always is affected. This can become a danger zone for employers who don’t know this rule, or who fail to advise their payroll company about the nature of the bonuses being awarded.
Regular Rate
When calculating an employee’s regular rate, you should count all money paid to the employee for their work or services. However, their regular rate does not include gifts or discretionary bonuses. An employee’s regular rate is important to understand because it’s the amount that’s used when calculating overtime pay.
Some lawyers call this the straight-time rate instead of the regular rate. In most cases, it’s the exact same thing.
Discretionary Bonuses
A bonus is discretionary if it’s entirely up to the employer’s judgment whether to pay the bonus at all. In other words, it’s a sum of money that not expected by the employee and hasn’t been promised. As a result, discretionary bonuses aren’t considered when calculating an individual’s regular rate of pay. As the United States Department of Labor has said, for a discretionary bonus:
-
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;
-
The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, 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.
Nondiscretionary Bonuses
Nondiscretionary bonuses are ones that the employer is obligated by law – including contract – to pay. Stated differently, it’s a bonus that the employee expects and knows about in advance. Examples of nondiscretionary bonuses include:
- Production bonuses
- Quality/accuracy bonuses
- Efficiency bonuses
- Attendance bonuses
- Safety bonuses
- Contractually agreed-upon bonuses, including in a collective bargaining agreement
Even if the employer has the option – or some leeway under certain circumstances – to not pay the promised bonus, it’s still not a discretionary bonus because of the employee’s expectation and the employer’s promise.
Nondiscretionary bonuses are considered when calculating an individual’s regular rate of pay.
Effects of Nondiscretionary Bonuses on Overtime Pay
We now know that nondiscretionary bonuses must be considered when determining your non-exempt employee’s overtime rate.
Let’s use the same employee we talked about already. She makes $20 per hour. Let’s assume she earns a $100 nondiscretionary bonus at the end of a one-week pay period. If the employee worked 43 hours that week, then her regular rate and overtime pay would be:
Regular Rate and Overtime Calculations
$20 per hour x 43 hours = $860 (total compensation for straight time IF all 43 hours had been paid at her straight-time rate)
$860 + $100 (bonus) = $960 (total compensation)
$960 ÷ 43 hours = $22.33 (regular rate – note this is higher than her straight-time rate)
$22.33 x .5 = $11.17 (half time premium pay rate)
$11.17 x 3 overtime hours = $33.49 (overtime pay due)
$960 + $ 33.49 = $993.49 (total due)
(Note: these calculations were affected by rounding… if using a calculator, your answer should be $993.488372)
Additional Note to Employers About Nondiscretionary Bonuses
If your company’s nondiscretionary bonus is paid at the end of a longer period of time – that is, beyond the duration of a work week, such as per month, quarter, or even annually, you’ll need to prorate it over the relevant period of time. Then at the end of the year or other specified time period over which the bonus was given, you must go back and prorate it for all the overtime worked throughout that period.
Overtime Rates and Questions
These can become thorny challenges. If you’ve got questions about overtime rates to be paid to your non-exempt employees, let us know. Reach out at info@coppolalegal.com or 716.839.9700.
