News & Insights

Fair Labor Standards ActJanuary 4, 2019by Stanton LawFLSA Deep Dive #1: Bonuses, Paid Holidays, and Overtime

by Amy Thomson.

Calculating Your Employees’ Regular Rate of Pay Under the FLSA

The US Department of Labor’s Wage and Hour Division (WHD) collected a record-breaking $304 million in back wages and damages from employers in 2018. It’s imperative employers better understand their Fair Labor Standards Act (FLSA) obligations. Then companies will be in a better position to defend against any potential wage and hour claims. Even if you think you understand the FLSA, it can be a complicated law and fraught with traps for even the most well-intentioned employers. This article is the first in a series Stanton Law will be writing on the FLSA.

It’s Bonus Season

During the holiday season and at the end of the year, many employers pay bonuses and provide paid holidays to their employees. Do you know whether your bonuses and paid holidays should be included as compensation when determining your employees’ regular rates of pay to calculate overtime? As an employer, you need to be clear on what should be included as compensation. Why? Because that bonus may change the regular rate of pay, which would increase the overtime rate as well. If you’re incorrectly determining the regular rate of pay and the overtime rate, you may be shorting your employees. You could be liable for overtime owed under the FLSA. In other words, you may have to pay overtime on the bonus you pay. Merry Christmas from the WHD.

Determining the Regular Rate of Pay

Under the FLSA, employers must pay nonexempt employees overtime compensation. Overtime is at least 1.5 times the employee’s regular rate of pay for all hours worked over 40 in a workweek. An employee’s regular rate of pay generally includes all compensation for employment, including their hourly wage or salary and other monetary payments (such as attendance and productivity bonuses). Bonuses that have to be included in the regular rate must also be included in the overtime rate.

On the other hand, the FLSA allows certain types of compensation to be excluded from the regular rate of pay. These exceptions include gifts and purely discretionary bonuses.

How can you tell whether the end-of-year bonus you give to your employees qualifies as a gift or discretionary bonus? You can always ask the employment attorneys at Stanton Law. Also, take a look at the following guidelines. Not only are they useful in helping make that determination but also whether you should involve a qualified Atlanta employment attorney if the situation is more complicated.

Bonuses and Gifts

Discretionary Bonuses

Only discretionary bonuses can be excluded from calculating the regular rate. Under the FLSA, for a bonus to be discretionary, it must meet bothof the following criteria:

  •       The employer must retain sole discretion to determine both the fact of payment and the amount until close to the end of the bonus period.
  •       The payment cannot be made as part of a contract, agreement, or promise that would cause employees to expect the payments regularly.

While discretionary bonuses may be excluded from the regular rate, they cannot be credited toward FLSA minimum wage or overtime compensation.

Non-Discretionary Bonuses

Examples of non-discretionary bonuses include those that recognize attendance, production or quality goals being met, and continued employment for a specific time. Likewise, bonus payments made as part of an earlier contract, agreement, or promise are non-discretionary. As such, they must be included in an employee’s regular rate. Bonuses promised at hiring or because of collective bargaining are also non-discretionary. In addition, bonuses announced to increase employees’ efficiency or to encourage employees to remain with the company are also non-discretionary.

Employer Gifts

The FLSA allows employers to exclude “gifts” from the regular rate of pay. Simply calling a payment a gift will not protect you from potential wage and hour violations if it really should have been included in the regular rate. Rather, gifts must meet certain criteria under the FLSA.

For FLSA purposes, gifts are payments made as a reward for service. These may include gifts during the winter holidays that are not tied to the hours worked, production, or efficiency.

A gift cannot be:

  •       A payment made under a contract or other legal obligation
  •       Measured by an employee’s production or efficiency
  •       An amount so large that an employee would consider it part of their wages (this factor is rather vague, so consult an employment attorney if you have questions)

Examples of gifts that can be excluded from the regular rate include:

  •       A winter holiday bonus equal to two weeks’ salary for all employees, plus an additional equal amount for each five years of service
  •       Merchandise discounts that aren’t based on hours worked
  •      Longevity payments not paid under an employment contract or agreement
  •      A reward for service that does not depend on the employee’s wages, efficiency, or production

While a gift can be excluded from the regular rate, the amount of the gift cannot be credited toward minimum wage or overtime compensation due under the FLSA.

Paid Holidays

In addition to paying out bonuses this time of year, many employers provide paid holidays to their employees. The FLSA allows employers to exclude paid holidays from the regular rate, and that holiday pay (like any other PTO) does not count toward “hours worked.” Compensation for a paid holiday cannot be credited toward FLSA minimum wage or overtime compensation.

Some employers require employees to work on days that would otherwise be a paid holiday. When an employee receives full holiday pay for working on a holiday (in addition to the compensation they receive at their customary rate for the work performed on that day), the holiday pay is not considered compensation for hours worked. The holiday pay can be excluded from the regular rate; however, it cannot be credited toward FLSA overtime compensation.

Other employers pay employees a premium rate for working on the holiday. In this case, the employee foregoes any holiday benefit. Only when the premium rate is more than 1.5 times the employee’s customary rate can this compensation qualify as a true overtime premium. In that case, it can be excluded from the regular rate and credited toward FLSA overtime compensation.

What’s Normal?

Employee gifts are typically considered discretionary for FLSA purposes. They are typically excluded from the employee’s regular rate. Likewise, paid holidays are usually excluded from the regular rate. As shown by the guidelines above, there are exceptions.

In addition to the types of compensation discussed here, there are other types that may need to be included in calculating an employee’s regular rate—even non-monetary compensation, such as housing. These will be addressed in a future article.

Make Sense of FLSA Requirements with an Atlanta Employment Attorney

The WHD is collecting record amounts of back wages and damages. Determining whether certain types of compensation should be included in the regular rate is often a fact-specific analysis. Make sure your company is in a good position to defend any claims. If you have questions about calculating compensation, contact the Atlanta employment attorneys at Stanton Law at 404-531-2341. No one likes to get Scrooged around the Holidays.