Question: How do we handle overtime pay calculations for hourly employees when they receive nondiscretionary bonuses?
Answer: A nondiscretionary bonus is a bonus based on an employee meeting criteria such as production, sales, quality, efficiency, or other performance standards. The federal Fair Labor Standards Act (FLSA) requires that overtime pay be calculated based on an hourly employee’s regular rate of pay, which includes commissions and nondiscretionary bonuses.
Under the FLSA, nondiscretionary bonuses must be apportioned back to the workweeks covered by the bonus period. If the hourly employee who earned the bonus also worked overtime during any workweek of a period covered by the bonus, you must recalculate the regular rate to determine the appropriate overtime rate.
For example, suppose your hourly employee’s regular hourly rate is $10. Assume the nondiscretionary bonus is $100 per month, but the pay period is weekly. Now assume the employee worked 50 hours each week and the work month was exactly four weeks. The following steps show how to calculate this employee’s weekly pay:
If you cannot identify the specific weeks in which the bonus was earned, then the bonus must be allocated across the entire bonus period. If the bonus was earned over a calendar year, you must:
For example, if an hourly employee is given a year-end nondiscretionary bonus of $1,000, $19.23 ($1,000 ÷ 52) must be added to the wages in any workweek in which the employee worked more than 40 hours. You must then recalculate the regular rate (and corresponding overtime premiums) for each week, incorporating these revised numbers.
Note that California requires employers to use a different overtime calculation method when including bonus or commissions. The California rules calculate the overtime rate using the employee’s non-overtime hours only, plus bonus or commission, where the FLSA uses all hours worked by the employee.
ThinkHR customers can get information on just about everything about wage and hour issues in their states and under the FLSA, including minimum wage and overtime, in the compliance section of their ThinkHR account. Still have compensation questions? Our Live advisors are ready to help.