Will bonuses affect employees’ ‘regular rate’ when calculating overtime pay under the FLSA?

Q. We want to offer incentive bonuses to hourly workers in order to increase business and productivity. Will these bonuses affect the employees’ “regular rate” under the Fair Labor Standards Act (FLSA) for purposes of overtime calculation?

A. In most cases, the answer is “yes.” Under the FLSA, prizes or bonuses awarded to an employee based on the quality, quantity or efficiency of work performed by the employee during the customary working hours at his or her normal assigned task are considered “additional remuneration.”

That compensation must be allocated over the period during which it was earned, and it effectively increases the employee’s average hourly rate.

This includes bonuses awarded for cooperation, courtesy, efficiency, highest production, best attendance, best quality of work, greatest number of overtime hours, longevity and other similar awards.

By contrast, prizes or bonuses paid for making business referrals or leads and for making bona fide suggestions that are not required, requested or expected of the employee generally do not constitute additional remuneration. (This applies to employees who are not normally required to make referrals and whose referrals took little or no time or work.)

Payroll Handbook D

Similarly, discretionary bonuses that are determined at the employer’s sole discretion at or near the end of the period the bonus covers (and which are not made pursuant to a contract or other agreement) likewise aren’t generally considered additional remuneration.

Finally, bonuses based on a percentage of an employee’s total yearly earnings (both straight time and overtime pay) are not considered additional remuneration, regardless of whether the bonus is discretionary.