If your organization pays discretionary bonuses, it may be paying out more overtime than necessary.
Reason: The Fair Labor Standards Act () requires you to pay overtime based on the employee’s regular rate of pay. In some circumstances, that rate includes bonuses, which may increase the regular rate and, therefore, the overtime tab.
But smart employers can design bonus plans that don’t increase the company’s overtime liability. The key? Bonuses must be discretionary (a true gift), not earned. If the bonus is paid at the employer’s sole discretion and isn’t expected or “earned,” it isn’t counted as part of the regular rate of pay.
Best bet: Include a bonus policy in your handbook. (See box below.) Then tell managers that they can’t promise any type of bonus or award. Also, as the following case shows, it isn’t enough to state that the amount of the bonus is discretionary. If you promise a bonus, it’s part of the regular rate.
Recent case: Several McNeil Technologies employees sued for unpaid overtime, claiming their bonuses should be included in their regular rate of pay because their supervisors had promised bonuses if they worked hard and had good attendance. The court agreed. It said the company had to include the bonuses as part of the regular rate, even though the bonus amounts were never specified, because the company used them as bait for better productivity. It didn’t matter that retained the right to set the amount of the bonus. (Gonzalez, et al., v. McNeil Technologies, No. 1:06-CV-204, ED VA, 2007)