Reason: The Fair Labor Standards Act (
you to pay overtime based on the employee’s regular rate of pay. In some
circumstances, that rate includes any bonus received, which could 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 company’s sole discretion—and
isn’t expected or “earned”—it isn’t counted as part of the regular rate of
Best bet: Include a bonus guideline in your policies or
company handbook. Then make sure you don’t promise
any type of bonus or award to employees.
Also, as a new court ruling 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 ruled that the company had to include the bonuses
as part of the regular rate, even though the bonus amount was never specified
because the company used it 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)
Sample bonus policy
Here’s a sample policy that can help prevent bonuses from being added
to employees’ regular rates of pay:
“The decision to award employees any incentive payment, bonus or award is always at the discretion of company. No employee is entitled to such an award, and the company may or may not make such a payment based on factors in its sole discretion.”