Q. What effect do end-of-year bonus payments have on a nonexempt recipient’s hourly rate of pay?
A. Year-end bonus payments could count as part of a nonexempt employee’s regular rate of pay, thereby increasing the overtime premium owed to that employee. Section 7(e) of the Fair Labor Standards Act requires the inclusion in the regular rate of pay all remuneration for employment except seven specified types of payments.
A bonus could fall under one of two exceptions: discretionary payments, or gifts made at Christmas time or on other special occasions. Each of these two categories, however, has specific criteria that must be met before a bonus payment can be excluded from the regular rate.
For a bonus to qualify for exclusion as a discretionary bonus, the employer must retain complete discretion as whether to make the payment, and if so, in what amount. The employer cannot rely on any prior promise or agreement in making the payment or determining its amount.
To qualify for exclusion under the Christmas gift exception, the bonus must be a bona fide gift. If it is measured by hours worked, production or efficiency; is so large that employees would reasonably consider it part of their wages for hours worked; or is paid pursuant to some agreement or policy, then the bonus cannot be considered a gift.
Where a bonus payment is considered a part of the regular rate at which an employee is paid, it must be included in computing the regular hourly rate of pay and overtime compensation.
For purposes of calculating the regular rate of pay, the bonus does not have to be included in its entirety in the week it is paid. Instead, an employer can apportion the bonus amount back over the workweeks of the period during which it was earned.
If a bonus payment already accounts for the overtime premium, then no additional payment is required. For example, a bonus plan may pay, as a bonus, a 10% premium of an employee’s total compensation, including overtime premiums. In this instance, the payment already covers overtime, and no additional overtime is required.
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