A bonus to a front-line worker, even during the pandemic, might be considered nondiscretionary and, if so, should be included in overtime calculations.
A nondiscretionary bonus is a bonus that employees know about and expect, and employers often forget to factor them into overtime pay, according to Steven Suflas, an attorney with Ballard Spahr in Denver and Cherry Hill, N.J.
"Most bonuses are nondiscretionary," said Jennifer Shaw, an attorney with Shaw Law Group in Sacramento, Calif. She added that discretionary bonuses, on the other hand, aren't included in the regular-rate calculation when determining overtime.
Nondiscretionary Bonuses
Under the Fair Labor Standards Act (FLSA), all compensation for hours worked and services rendered is included in the regular rate of pay. The regular rate includes hourly wages and salaries for nonexempt workers, most bonuses, shift differentials, on-call pay and commissions. It excludes health insurance, paid leave, holiday and discretionary bonuses, and certain gifts.
"If a bonus is nondiscretionary within the meaning of the FLSA, the amount of the bonus must be added to the employee's other compensation for purposes of calculating the employee's regular rate, which is then used to calculate the employee's overtime rate," said David Weldon, an attorney with Neal, Gerber & Eisenberg in Chicago.
[SHRM members-only how-to guide: How to Calculate Bonuses into a Regular Rate of Pay for Overtime Purposes]
Examples of nondiscretionary bonuses include:
- Bonuses based on a predetermined formula (e.g., production bonuses).
- Bonuses for quality or accuracy of work.
- Bonuses announced to induce more-efficient work.
- Attendance bonuses.
- Safety bonuses (e.g., for a certain number of days without a workplace accident).
"Whether bonuses to front-line workers are nondiscretionary or discretionary really depends on the underlying purpose of the bonus," said Jeffrey Ruzal, an attorney with Epstein Becker Green in New York City. "If the bonus is intended as an incentive for additional hours worked, then that would constitute a performance-based reason for the bonus that would likely cause it to be characterized as nondiscretionary.
"That said, employers must keep in mind the rule of thumb that if a bonus is not guaranteed, based on performance or expected by the employee in question, then it may likely be characterized as discretionary and thus excludable from the regular rate for purposes of calculating overtime," he added.
A bonus that is tied to hours of work and considered to be hazard pay likely would be included in the regular-rate calculation, said Justin Barnes, an attorney with Jackson Lewis in Atlanta.
Nondiscretionary bonuses are included in the regular rate of pay for the purposes of computing overtime by spreading the bonus over the period for which it is intended to be earned, and then retroactively applying the bonus on a pro rata basis for each workweek, Ruzal said. For example, if an employee earns a $400 nondiscretionary bonus for productivity in any given month that has four weeks, the bonus should be allocated over the four-week earning period, resulting in $100 in bonus earnings for each week.
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Discretionary Bonuses
An employer would have a strong argument to exclude a one-time bonus when the bonus represents a thank-you to employees for their hard work during the pandemic, so long as the bonus is not promised in advance nor tied to hours worked, Barnes said.
Shaw noted that a bonus is discretionary only if all the following statutory requirements are met:
- The employer has the sole discretion to determine whether to pay the bonus until at or near the end of the period that corresponds to the bonus.
- The employer has the sole discretion to determine the amount of the bonus until at or near the end of the period that corresponds to the bonus.
- The bonus payment is not made according to any prior contract, agreement or promise causing an employee to expect such payments regularly.
"The standard for what constitutes a discretionary bonus that need not be included in an employee's regular rate is narrower than many employers realize," Weldon said.
Examples of common bonuses that may be discretionary and excludable from overtime calculations include:
- Bonuses not awarded according to pre-established criteria to employees who made unique or extraordinary efforts.
- Employee-of-the-month bonuses.
- Severance bonuses.
- Referral bonuses to workers not primarily engaged in recruiting activities, subject to certain other criteria.
"While the Department of Labor has listed bonuses for overcoming a challenging or stressful situation as an example of a discretionary bonus, if the bonus is provided to employees in a way that the employees expect such payment, then the bonus could be deemed to be a nondiscretionary bonus under the FLSA and required to be included in overtime calculations," said Zachary Siegel, an attorney with Hogan Lovells in Philadelphia.
Employers also should review state and local wage and hour laws for additional bonus requirements, said Andrew Singer, an attorney with Tannenbaum Helpern Syracuse & Hirschtritt in New York City. Some state wage and hour laws' definitions of discretionary bonuses are different from the FLSA's.
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