Non-Discretionary/Incentive Bonuses Under the FLSA

SESCO Management Consultants

Includable In Earnings

Incentive, production, and attendance bonuses are part of a non-exempt employee’s earnings which must be included in their regular rates when figuring the overtime pay due under the Fair Labor Standards Act (“FLSA”). To be excluded from the overtime pay calculations, bonuses must not be paid pursuant to a “contract, agreement, or promise causing the employee to expect such payments regularly,” a limitation found in Section 7(e)(3)(a). For this reason, bonuses fail to qualify for exclusion when they are promised to newly hired employees, when they are embodied in union contracts, and when they are announced to employees to induce them to work more steadily, rapidly, or efficiently or to remain with the employer.

Types of Bonuses

The types of incentive and production bonuses which must be taken into consideration when figuring overtime pay, because of a contract, agreement, or promise, are those based on:

-Attendance
-Production by individual employees
-Production by a group of employees
-Quality of work
-Accuracy of work
-Length-of-service
-Cooperation
-Courtesy
-Efficiency
-Number of overtime hours worked.

Increase in Overtime Pay

The requirement that incentive, production, and attendance bonuses be included in computation of an employee's regular hourly rate causes a proportionate increase in his overtime pay, since the regular rate is the basis of FLSA overtime compensation.

No Offset Against Overtime Pay

Incentive and production bonuses may not be credited against overtime pay required by the FLSA. They are part of the employees' regular earnings. This is true even if the percentage of the bonus above a certain quota is directly increased in proportion to the number of hours worked.

Fixed Percentage Bonus

An employer is not required to retrospectively recalculate the regular rate if the employer pays a fixed percentage bonus that simultaneously pays overtime compensation due on the bonus. For example, a bonus that is 10 percent of straight-time wages (the hourly rate × straight-time hours worked up to 40) and 10 percent of overtime wages (1.5 × the hourly rate × straight-time hours worked over 40) does not require recalculation of the regular rate because the bonus includes the overtime compensation due on the bonus as an arithmetic fact, fully satisfying the FLSA’s overtime requirements. Similarly, a bonus that is 10 percent of total compensation—including hourly wages, overtime, bonuses, commissions, etc.—does not require recalculation.

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