Is this woman a volunteer if she was paid?

Our clients have often been frustrated to learn that most production-based bonus systems must be included when calculating an employee’s overtime rate of pay. For some of you, the first you heard of this was when speaking with a CEDR Solution Center advisor. Calculating bonus overtime is a complex headache for employers. Many give up and simply try to exclude any overtime altogether. But with travel and training pay usually counting as time worked, overtime is sometimes unavoidable. The good news is that there is a way through and out of this mess, and we will keep this admittedly eye-glazing material as simple as possible.

Back to the Basics

Let’s start from the beginning. The Fair Labor Standards Act (FLSA) applies to all U.S. employers with $500,000 or more in gross annual receipts. The FLSA dictates the rules surrounding minimum wage and overtime, among other things. Under this federal rule, all non-exempt employees must be paid overtime for all hours worked over 40 in a workweek. Some states, like California, also require overtime for time worked over 8 hours in a day. A workweek may be defined by the employer, as long as it includes seven consecutive days.

The overtime rate of pay is one and a half times the regular rate of pay. This is where many people get confused. The regular rate of pay is NOT just the straight time hourly wage. Instead, the regular rate of pay is the total compensation divided by the total hours worked in a workweek. Total compensation includes all forms of compensation that are not specifically exempted under the FLSA. Exemptions include gifts, expense reimbursements, or truly discretionary bonus pay. In order for a bonus to qualify as exempt from the overtime calculation, it cannot be measured or dependent upon hours worked, production, or efficiency. It cannot be based on any formula where the employee would come to expect it on regular basis.

Factoring Bonuses Into Overtime Pay

Non-discretionary bonus pay includes most typical incentive programs, including those based on production or collections, number of new patients, or certain treatments sold, and thus, must be considered as part of the employee’s wage. As a result, when such bonuses are earned, they must be included in the calculation of the regular rate of pay for the purposes of overtime. A purely discretionary bonus, such as a holiday bonus, would not have to be included.

Here’s how the earned bonus is included in the calculation of overtime:

_(Wages + Non-Discretionary Bonus)_ =   Regular Rate of Pay
 Total Hours Worked in a Workweek

Regular Rate of Pay x 1.5 = Overtime Rate of Pay

For example, let’s say an assistant works 42 hours in a week at $10.00/hour, and earns a bonus of $50 that week.

(42 hours x $10/hour) + $50 bonus = $420 + $50 = $470 (straight pay)

$470 (total straight pay) / 42 (total hours) = $11.19 (regular rate of pay)

$11.19 x 1.5 = $16.79 (overtime rate of pay)

Total weekly pay = (40 x $11.19) + (2 x $16.79) = $481.19

When a Bonus is Earned Over a Longer Period

If a bonus is based on office production over a longer period of time than a pay period, then the overtime is calculated as usual, until the bonus amount earned is known. At the end of the bonus period (usually a month or a quarter), the total bonus must be allocated across all the work weeks in the bonus period, and any overtime earned during any week within that bonus period must be re-calculated and the difference paid.

Using the same assistant who is paid at $10 per hour, let’s now imagine that a bonus isn’t earned until the end of the month, and during one week of that month, the assistant worked 48 hours (8 hours of overtime). For the original pay period, your assistant would be paid based on the normal overtime calculation at time and a half. (Time and a half is correct at this point because there is not yet a bonus to be accounted for—so her regular rate of pay is currently the same as her straight pay.) She is paid (40 x $10) + (8 x $15) = $520.

At the end of the month, we determine that she has earned a $400 bonus for the month based on meeting her production goals. If there are four weeks in the month, and it is reasonable to assume the bonus was earned equally over the four weeks, we can allocate $100 in bonus pay for the workweek in which overtime was worked. Here’s how you calculate the extra pay due:

$100 / 48 hours = $2.08 (increase in the regular rate of pay)

$2.08 / 2 = $1.04 (increase in half-time premium for each overtime hour)

$1.04 x 8 hours = $8.32 (additional overtime premium pay due as a result of the bonus).

This additional overtime premium pay should be added to the employee’s pay as soon as the bonus amount attributable to the prior work week(s) can reasonably be calculated, and is best itemized separately on a pay stub as an “overtime correction” or something to that effect.

Three Things You Can Take Away:

  1. This is one of the areas that the DOL will focus on if you get audited because it is a common error.
  2. Any employee can file an anonymous complaint and trigger an audit.
  3. Many payroll companies are NOT getting these calculations correct, and employers find out only when they are charged with back pay to their employees. Don’t get caught – call CEDR with further questions.

Need help? Members may call 866-414-6056 to speak with an advisor.