Employers Beware: Bonus Compensation May Result in Additional Overtime Pay

Posted: August 22, 2020 |

It is not uncommon for employers to compensate employees with non-discretionary bonuses to reward them for their hard work.  However, what employers commonly fail to do is factor in those non-discretionary bonus payments when calculating the amount of overtime pay owed to employees.  Overtime pay includes much more than simply multiplying the employee’s base wage by 1.5 for overtime or 2.0 for double-time.  When an employee works overtime and earns a non-discretionary bonus, the employee is legally entitled to receive additional overtime pay based on the amount of the non-discretionary bonus.  This additional overtime pay is required so that the earned non-discretionary bonus is included within the employee’s “regular rate” of pay for purposes of calculating overtime.

Employees who work overtime must be compensated at the rate of 1.5 times the employee’s regular rate for all hours worked in excess of 40 in any workweek, for the first four hours in excess of eight in any one workday, and for the first eight hours on the seventh day of work in any one workweek.  Additionally, overtime is owed at the rate of double the employee’s regular rate of pay for all hours worked in excess of 12 in one workday and for all hours worked in excess of eight on the seventh day of work in one workweek. 

When the employee earns a non-discretionary bonus and also works overtime, the employee must be compensated for the overtime worked at his/her “regular rate” of pay.  Simply multiplying the employee’s base hourly rate by 1.5 differs from the employee’s regular rate and will result in the employee being undercompensated because the “regular rate” is more than just the base hourly rate.  An employee’s “regular rate” includes any type of non-discretionary bonus payment.  A non-discretionary bonus refers to pay promised to the employee, such as where the employer promises to pay the employee a percentage of the employee’s sales or to pay an extra $10 per day to work on the weekend.

The Division of Labor Standards Enforcement (DLSE) Enforcement Policies and Interpretations Manual sets forth instructions on how to calculate the additional overtime that must be paid when an employee earns a non-discretionary bonus.  There are two alternative methods which must be followed depending on the type of non-discretionary bonus that is paid to the employee: the flat-sum bonus and the production bonus.

 

Non-Discretionary Flat-Sum Bonus Overtime Pay

A flat-sum bonus is a predetermined bonus that does not vary in amount.  Examples of a flat-sum bonus include paying an employee an extra $10 per day to incentivize the employee to work on a Saturday or paying a $500 bonus to work through the end of the holiday season.  A flat-sum bonus is not designed as an incentive for increased production, but rather, to incentivize the employee to remain with the employer.

To calculate the additional overtime owed to an employee who earns a non-discretionary flat-sum bonus the employer must divide the employee’s bonus by the number of non-overtime hours worked by the employee within the bonus period.  The bonus period is the time frame in which the bonus is earned.  For example, if the employee earns the flat-sum bonus over the course of two weeks, the flat-sum bonus should be divided by the total number of non-overtime hours worked by the employee during those two weeks.  The quotient of this calculation provides the per-hour value of the bonus. 

To determine the overtime rate for the bonus, multiply the per-hour value of the bonus by 1.5 for overtime and 2.0 for double-time.  The product of this calculation is the “Overtime Bonus Rate.”  The Overtime Bonus Rate shall then be used to calculate the amount of additional overtime pay owed to the employee by multiplying it by the number of overtime hours worked within the bonus period.

Example:        Employee earns $23/hour and worked 85 hours (80 hours of straight time and 5 hours of overtime at time and one-half) in a two-week pay period.  The employee also earned a $1,000 non-discretionary flat-sum bonus that pay period.

Step 1:            $1,000 non-discretionary flat-sum bonus ÷ 80 non-overtime hours during bonus period = $12.50 per-hour value of the bonus.

Step 2:            $12.50 per-hour value of bonus x 1.5 (overtime) = $18.75 Overtime Bonus Rate

Step 3:            $18.75 Overtime Bonus Rate x 5 overtime hours = $93.75 overtime due on bonus

Therefore, in addition to the employee’s hourly wages, the employee under this example is owed an additional $93.75 in overtime pay when provided with the non-discretionary flat-sum bonus of $1,000.

 

Non-Discretionary Production Bonus Overtime Pay

A production bonus is based on a formula other than a flat amount such as an agreement to pay an employee a percentage of his/her production.  To calculate the additional overtime owed to an employee who earns a non-discretionary production bonus the employer must divide the employee’s bonus by the total number of hours worked within the bonus period.  Unlike the flat-sum bonus overtime calculation, this calculation includes both the employee’s straight time and overtime hours as the divisor.  The quotient of this division provides the per-hour value of the bonus. 

Next, the per-hour value of the bonus must be multiplied by 0.5 for overtime and 1.0 for double-time, which will provide the Overtime Bonus Rate.  The Overtime Bonus Rate shall then be used to calculate the amount of additional overtime pay owed to the employee by multiplying it by the number of overtime hours worked within the bonus period.

Example:

Employee earns $23/hour and worked 85 hours (80 hours of straight time and 5 hours of overtime at time and one-half) in a two-week pay period.  The employee also earned during the pay period a five percent non-discretionary production bonus totaling $1,000.

Step 1:            $1,000 non-discretionary production bonus ÷ 85 total hours during bonus period = $11.77 per-hour value of the bonus.

Step 2:            $11.77 per-hour value of bonus x 0.5 (overtime) = $5.89 Overtime Bonus Rate

Step 3:            $5.89 Overtime Bonus Rate x 5 overtime hours = $29.45 overtime due on bonus

Therefore, under this example the employee is owed an additional $29.45 in overtime pay when provided with the non-discretionary production bonus of $1,000.

Employers who pay bonuses or commissions to employees are strongly recommended to review their overtime pay policies and procedures to ensure all overtime pay is being properly calculated.  More complex bonus and commission plans also require special care and consideration.  For example, bonus and commission plans which span across multiple pay periods require more advanced calculations and will result in larger overtime payments. 

This blog is not meant to provide specific legal advice.  For advice specific to your business, please contact any of the employment attorneys in our Employment Practices Group who are ready to assist you with addressing your questions about paying bonuses, commissions, and overtime.

Jacob P. Menicucci

Jacob P. Menicucci, Esq. is an Associate and a member of Ferruzzo & Ferruzzo, LLP's Employment Practices Group.  Jacob litigated numerous employment matters, including lawsuits involving wage and hour violations, discrimination, harassment, and whistleblower retaliation.  Jacob counsels employers to ensure their policies and practices are in compliance with California's ever-changing employment laws.   

 

Mr. Menicucci may be reached by phone at (949) 608-6900 or email jmenicucci@ferruzzo.com