Bonuses are in the news, but you don't have to be a failed multinational insurance giant to find yourself tripped up by the tricky math of variable compensation. If you rely on a bonus plan to help retain valued employees and motivate them to work hard, beware this trap: Employees who worked overtime during the bonus-earning period will be entitled to additional overtime pay after they get their bonuses.
Here's why: Mandatory bonuses (those based on set factors such as hours worked, length of service and so on) become wages under wage-and-hour laws. That changes the hourly rate the employees earned.
In turn, that means you owe them more for those overtime hours they worked, since the overtime rate (1.5 times the hourly rate) will be higher than what you already paid them based on their regular rates of pay.
The calculation can be complicated, so get expert help when you set up the bonus program in the first place. You need to get the math right. Otherwise, your bonus incentive plan could lead to litigation instead of increased productivity.
Recent case: Costco paid a bonus twice a year, in April and October, to employees who met certain seniority standards and had worked at least 1,000 hours in the six months before the bonuses were issued.
Several employees sued the retailer, contending they had received the bonuses, but not enough extra money for overtime hours they worked during the bonus period. Costco used a formula to calculate the overtime pay, but the employees claimed it netted too little.
Eventually, a California appeals court agreed the company had used a legitimate formula. But the ruling in Costco’s favor came only after the dispute had cost the company thousands in legal fees and hassle. (Marin v. Costco, No. A116847, Court of Appeal of California, 2008)