Episode 12: Bonuses

Hear how a decades-old landmark law guides today’s employers on some of the most pressing issues facing companies. Bill Martucci, who leads Shook, Hardy & Bacon’s national Employment Litigation and Policy Practice, shares insight in these bite-sized podcasts focusing on the Fair Labor Standards Act. Whether you’re a seasoned general counsel or just finding your way through the myriad of state and federal wage and hour laws, listening to Bill’s soothing discourse is time well spent.

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You’re listening to “A Window into Wage and Hour,” a podcast series that shines the light on time and money laws impacting your business today.

Welcome to our podcast on wage and hour. This is Bill Martucci, the practice group leader for Shook Hardy national employment litigation and policy practice. And here we are in Washington, D.C., and we are speaking of bonuses.

We’re speaking of bonuses under the Fair Labor Standards Act. We’re looking at bonuses as a significant topic as it relates to the regular rate. As you recall, we have spoken of the regular rate as a term of art. The regular rate is important because it determines essentially the hourly amount upon which the overtime rate is calculated. So, as we have discussed in the past, if we have a regular rate of $20 an hour, then the overtime rate would be one and one-half times that, which would be $30 an hour.

But what about bonuses? Are bonuses included in the regular rate or are bonuses excluded from the regular rate? Discretionary bonuses are such as to be excluded from the regular rate of pay. Let’s look a little bit further at what is considered a discretionary bonus so that it is appropriately excluded from the regular rate of pay for purposes of calculating overtime pay.

There are three critical ingredients for a discretionary bonus. The reason this is significant is because, as we say, it impacts the regular rate, which impacts the overtime rate, which, frankly, impacts the potential payments by an employer.

To be a discretionary bonus under the Fair Labor Standards Act, it must be such that the employer has the sole discretion as to whether to pay the bonus. Second, the employer must have the sole discretion to determine the amount of the bonus. And third, the bonus payment must be such that it is not a promise, a contract or an agreement causing an employee to expect such payments to be made regularly. In other words, it is discretionary, both with respect to whether it is paid and to the amount, and there is not some kind of understanding otherwise that would make one think it would be a regular payment.

In contrast, what are considered excludable discretionary bonuses? In other words, what are not discretionary, what would be considered bonuses excluded from that category of discretionary bonuses? Well, in that regard, there are certain categories of bonuses that are more formulaic in nature. You must analyze this a bit deeper to appreciate how it is viewed by the U.S. Department of Labor and how it is viewed by lawyers who focus on these kinds of issues impacting the regular rate.

Bonuses that are based on some predetermined formula, whether it is an individual productivity or group production basis, are considered included within the regular rate. So the word bonus does not by itself exclude it from the regular rate. It has to be analyzed carefully—is it discretionary or is it more formulaic in nature? In that regard, bonuses for quality or accuracy of work, bonuses announced to employees to induce them to work more efficiently, attendance bonuses, and safety bonuses are all considered examples of non-discretionary bonuses. As a result of being a non-discretionary bonus, it must be included in the regular rate, and that will impact the overtime rate.

As we conclude this topic, we can see how this concept of bonus, as simple as it is to say the word bonus, as straightforward as that concept appears on the surface, it must be analyzed very carefully. If it is a discretionary bonus, it need not be included in the regular rate. But if it is a non-discretionary bonus, which is rather broadly defined, then it must be included in the regular rate for the calculation of overtime.

Thank you so much.