Small Bonuses May Count Toward Determining Who Is Exempt

Allen Smith, J.D. By Allen Smith, J.D. March 8, 2019

​Small, nondiscretionary bonuses may become more popular if the proposed overtime rule is finalized. The bonuses could be counted toward the recommended salary-level threshold of $35,308 per year for determining whether someone is exempt from the overtime requirements.

Using bonuses to bump a worker over the overtime salary threshold would be a new practice. Under the Department of Labor's (DOL's) proposed rule, nondiscretionary bonuses and commissions paid on an annual or more frequent basis would satisfy up to 10 percent of the standard exempt salary level for the white-collar exemptions. So instead of guaranteeing a salary of $679 per week to reach the threshold, an employer could pay $611.10 per week and distribute bonuses, incentive pay or commissions equal to at least $3,530.80—10 percent of $35,308—at the end of the year to reach the salary-level threshold. The 2016 overtime rule, which was blocked by a federal district court, would have let employers include only nondiscretionary bonuses paid at least quarterly.

Counting bonuses to meet the threshold is an interesting idea, but there are a few issues to consider.

"My concern is what happens if an employer trying to use this provision makes a mistake," said Tammy McCutchen, an attorney with Littler in Washington, D.C., and vice president of strategy for ComplianceHR. What if the bonus falls short? Will the employer owe overtime for the whole year all at once? And would it owe that for the one employee who wasn't compensated correctly or for all employees in the same job classification? Employers should seek answers from the DOL during the 60-day notice-and-comment period, she said.

Most bonuses are nondiscretionary, said Ryan Glasgow, an attorney with Hunton Andrews Kurth in Richmond, Va. Discretionary bonuses are distributed solely by employer choice, in the amount the employer decides. Holiday bonuses may be discretionary bonuses. Spot bonuses may be, as well, unless they are awarded too frequently, in which case they may be considered nondiscretionary, Glasgow said.

If a company seeks to motivate employees through a bonus program that describes how the bonus is earned, when it is paid and the metrics used to pay it, the bonus is nondiscretionary.

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

Advantages to Counting Bonus Toward Salary-Level Threshold

McCutchen said that if the bonus provision in the proposed overtime rule is finalized, bonuses are likely to become a more common component of compensation. She can see some advantages to using small bonuses to reach the proposed salary-level threshold of $35,308. It may be one way to avoid salary compression, for example.

Salary compression occurs when the salary of someone at a lower level, such as a clerk, comes close to reaching the salary of someone at a higher level, such as a manager. If the clerk's salary is bumped up to $35,308 per year so the employer won't have to pay him or her overtime, the employer may feel compelled to also raise the salary of the clerk's manager, who had been earning $35,000 per year. It's a domino effect, McCutchen noted.

The bonus provision of the proposed rule would allow the employer to continue paying the clerk an annual salary of $31,777.20 plus a 10 percent bonus, for example, to meet the salary-level threshold. The employer then might not feel compelled to raise the salary of the manager as much as it would have had it raised the clerk's salary to $35,308, McCutchen said.

A company with ebbs and flows in its earnings may not have the steady income year-round to raise an employee's salary to the salary-level threshold, noted Jeffrey Ruzal, an attorney with Epstein Becker Green In New York City. Such an organization might be likelier to use bonuses to reach the salary-level threshold.

More Concerns with Bonus Provision

If an employer doesn't pay an employee enough of a bonus during the year to meet the salary-level threshold, it may make a one-time payment to make up the difference. But Glasgow said that if the bonus provision is finalized, employers should consider whether the administrative burden of monitoring whether enough of a bonus has been paid is worth the effort.

McCutchen, who served as the Wage and Hour Division's administrator during the 2004 overtime rule revision, said, "I still have concerns that the provision could be a boon to plaintiffs' attorneys filing collective actions for employers who get it wrong. Unless paying [exempt employees] at least $35,308 is a substantial economic burden, I would not recommend using the 10 percent bonus option."

[Visit SHRM's resource page on FLSA exemption classification.]



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