Payroll departments need to be aware of the requirements regarding additional income paid to employees and overtime regulations regarding overtime pay. That income could include bonuses, commissions, even regular payments for other circumstances. If additional payments are made to hourly or non-exempt employees, it could have an effect on how overtime pay is calculated.

First, lets look at the payments that are involved.  The regulations distinguish between discretionary and non-discretionary payments made to employees in determining if they will have an effect on OT pay. A discretionary payment is one-time payment made to an employee on a non-regular schedule basis at the whim of management. An example may be a year-end bonus where management specifies that a bonus may be paid as long as certain criteria are met after a certain time frame. They have no idea until the certain time frame has passed that the criteria will be met and thus have no idea that the bonus will be paid until that time period has passed and the criteria met.  Even then they could choose not to pay the bonus. Thus a discretionary bonus. It is up to management’s discretion if this rarely paid payment will be made.

Non-discretionary payments are those that management has specified will be paid on a regular basis based on certain criteria. Examples may include monthly bonuses based on performance standards or commissions based on sales achieved. Employees come to expect these payments to be paid on a regular basis.  They know they will be getting this extra income and when they will get it. At this time, only non-discretionary payments can have an effect on OT calculations.

The issue with non-discretionary payments is that for non-exempt employees who are subject to overtime, the FLSA notes that this additional income, in essence, changes the employee’s rate of pay per hour and thus changes their OT premium pay.  For example:

  • Employee Suzy Goodworker earns $10/hr. She is paid weekly.
  • She works 45 hours in the pay period. Thus she would normally be paid 40 hrs at $10 plus 5 hrs at $15 (her overtime wage at 1.5 x $10)
  • But that pay period, her employer also pays her the monthly $200 bonus for good performance.

In this situation, employers unaware of this regulation will  simply calculate Suzy’s gross wage at (45  x  $10) + (5  x  $5) + $200 = $675.00. But because of the $200 non-discretionary bonus, this amount is incorrect.

Because of the  non-discretionary bonus, her gross wage needs to be calculated taking into account the additional $200 of income in order to comply with the FLSA:

  • Employee Suzy Goodworker earns $10/hr. She is paid weekly
  • She works 45 hours in the pay period.
  • But that pay period, her employer also pays her the monthly $200 bonus for good performance.
  • Thus instead of earning $10/hr, she is really earning $14.44/hr –  (45 x $10) = $450 + $200 = $650/45 = $14.44/hr)
  • Thus her overtime premium is really $14.44 /2 = $7.22.
  • Thus her gross wage for the period will be (45 x $10)  +  (5 x $7.22) + $200 = $686.10.  Note the difference.
This can be confusing and tedious to calculate, but if you are not in compliance with FLSA, you may be paid a visit by a representative of the Dept. of Labor. The next time you want to consider making additional payments to your employees, keep in mind the distinction between  discretionary and non-discretionary and the role those additional payments may play in determining OT pay.
Feel free to contact us if you have any questions regarding this topic.