Using bonuses to encourage employees to pick up shifts? Don’t forget them when it’s time to calculate overtime.
In today’s job market employees can be hard to find. As customer orders increase while the world reopens in preparation for what we will hope will be a post-pandemic world, there are not enough employees to cover the shifts needed to meet demand.
As employers struggle to meet demand, many have turned to offering attendance bonuses to encourage workers to take less desirable shifts. A $50 bonus for anyone willing to work third shift. An additional $3.00 per hour for employees willing to work Saturdays. Double pay for anyone willing to pick up a 6th shift. Sound familiar?
In Part 1 of this blog we discussed some basics about calculating overtime. In this Part II we will focuses on some of the different types of bonuses These bonuses seem straight forward, until you start trying to calculate overtime pay.
Discretionary vs. Non-Discretionary Bonuses?
When you first read over the list of what is excluded it can be easy to read over the word “discretionary” when you see bonuses on the list and simply exclude all bonuses. Or an employer may feel all bonuses to be discretionary and therefore they do not need to be included. Unfortunately, these views are incorrect as the Final Rule recognizes a clear distinction between discretionary and non-discretionary bonuses.
First know that the label given a bonus does not determine whether it is discretionary. Call it what you want, the Department of Labor will still look at the facts and make its own determination.
Under the Final Rule, bonuses are discretionary if only if all the statutory requirements are met:
- The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
- The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
- The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.
Any bonus that does not satisfy the “discretionary” test is considered “non-discretionary. They are nondiscretionary because the employees know about and expect the bonus. The fact that the employer has the option not to pay the promised bonus does not make the bonus discretionary.
Some examples of non-discretionary bonuses include sign-on bonuses with clawback provisions, longevity or retention bonuses, and most attendance and production bonuses related to quality and accuracy of work as types of bonuses. Conversely, sign-on bonuses with no clawback provision, bonuses recognizing an employee’s special or extraordinary efforts that are not awarded according to preestablished criteria, referral bonuses for employees other than recruiting personnel, severance bonuses, bonuses for overcoming challenging or stressful circumstances, and employee-of-the-month bonuses are identified as the types of bonuses that are typically considered discretionary because they are usually not promised in advance and are typically for amounts determined at the sole discretion of the employer.
Are Attendance Bonuses Included in Overtime Pay?
Generally, yes. When it comes to attendance bonuses – when employers make payments to encourage attendance at work – the Final Rule says they are typically non-discretionary bonuses that must be included in the regular rate because they are made “pursuant to a contract, agreement, or promise causing the employee to expect such payments.”
Are Buy-Back Bonuses Included in Overtime Pay?
What about when an employer pays out unused vacation pay at the end of the year. Is that an “attendance bonus”? Generally, no. Those type of policies, generally called “Buy-Back” policies, are distinguishable from attendance bonuses because the excludable buy-back payment results in the employee no longer having that leave available to use, i.e., the employee’s leave balance is diminished by the amount of leave ‘‘bought back.’’ Conversely, with an attendance bonus the employee receives an additional payment that does not affect his or her leave balance, or the payment is otherwise tied to factors that are not related to the holiday, vacation, or illness period. However, the Department of Labor did not definitively state that all buy-back policies are excluded, saying “the distinction between an excludable payment for forgoing leave and an attendance bonus is usually very fact specific.”
Are Longevity Bonuses Included in Overtime Pay?
What about longevity bonuses? The Department of Labor says that amounts “paid as gifts and payments in the nature of gifts made on holidays or on other special occasions as a reward for service may be excluded from the regular rate, provided the amounts of the gifts (or payments) are not measured by or dependent on hours worked, production, or efficiency.” Longevity bonuses are generally excludable from the regular rate as gifts when given as a reward for service or tenure but only if the bonus payments is not paid pursuant to a contract and is not so substantial that it can be assumed that employees consider it a part of the wages for which they work.
How do you calculate Overtime Pay?
Overtime pay is calculated based only on payments to the employee that are required to be included in the regular rate of pay. The Department of Labor provides the following steps for calculating the regular rate of pay and overtime compensation due when the employee is paid on an hourly, piece rate, day rate, job rate, commission, or salary basis.
- Step 1: Total compensation for the week (except the statutory exclusions) ÷ Total hours worked in the week = Regular Rate per hour for the week (must be at least the federal minimum wage)
- Step 2: Regular Rate x (.5) = Half-time premium for each overtime hour (note the straight time for the overtime hours is included in Step 1)
- Step 3: Half-time premium pay rate x Overtime hours = Overtime compensation due
Overtime Calculation Examples
The Department of Labor Fact Sheet 56C provides a few examples to help employers navigate these tricky calculations.
Should you have any questions about calculating overtime, the difference between discretionary and non-discretionary bonuses or you would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847)253-8800 or email us at firstname.lastname@example.org.
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