April 10, 2010
Under the federal FLSA, bonus payments are divided into discretionary and nondiscretionary types (29 USC 207; 29 CFR 778.211). Nondiscretionary bonuses are included in an employee’s regular rate of pay for the purpose of determining overtime, while discretionary bonuses are not included in an employee’s regular rate of pay to determine overtime.
Bonuses are nondiscretionary if the employer promises, contracts, or agrees to pay a bonus to the employee. Nondiscretionary bonuses include attendance bonuses.
The total bonus amount is divided by the number of weeks in the bonus period (see Calculation below).
Calculation. If a bonus is paid over one weekly period the calculation is simple. For example, an employee who works a 45-hour week at $10 per hour, in a week with no bonus, earns 5 hours of overtime at $15 per hour and the week’s total pay is $475 ($400 regular pay and $75 overtime). In a week with a production bonus, the employee’s regular rate of pay (for purposes of calculating overtime compensation) is determined by adding the pay for all hours worked at the nonovertime rate plus the bonus and dividing this sum by the total hours worked. Thus, if a $45 production bonus is paid, the regular hourly rate for the week rises by $1 an hour to $11 per hour (45 hours times $10 per hour plus $45, which equals $495 all divided by 45 hours; the overtime rate increases to $16.50 per hour; and the week’s total pay is $527.50 ($400 regular pay for 40 hours work, plus $45 bonus, plus $82.50 overtime pay for 5 hours of overtime work).
If the bonus is attributed to a period longer than a workweek, the bonus may be disregarded in computing the regular rate of pay until the amount of the bonus is determined. Until that time, any overtime is calculated and paid based on the regular rate of pay, exclusive of the bonus. When the amount of the bonus is set, it must be apportioned back over the workweeks of the period during which it was earned. An additional amount of compensation must then be paid for each workweek during the period in which the employee worked overtime. The amount of additional pay is equal to one-half the hourly rate of pay allocable to the bonus for that week multiplied by the number of overtime hours worked in that week.
For example, if the employee described above is paid a $400 bonus for a 10-week period during which the employee twice worked 45-hour weeks, $40 of the bonus is attributed to each week. The hourly rate allocable to the bonus is $1, and the employee must be paid an additional $2.50 for each of the weeks in which the employee worked 45 hours (1/2 times $1.00 times 5 hours).