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Payroll Today

New wrinkle in exempts’ pay: Nondiscretionary bonuses

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Alice Gilman

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in Payroll Today

Last week, the Department of Labor released its final regulations raising by more than 100% the amount employees must earn each week to be considered exempt under the Fair Labor Standards Act. Included in the regulations is a new provision that allows you to partially satisfy the salary amount by including up to 10% of nondiscretionary bonuses and other incentive payments, such as commissions, in exempts’ salary. But that begs the question of just what counts as a nondiscretionary bonus.

Factoring in bonuses

Lots of exempt employees earn bonuses these days. But they have to be nondiscretionary bonuses in order for you to count them against the requirement that they receive at least $913 every week (beginning Dec. 1, 2016).

Nondiscretionary bonuses are the same payments that you must include in nonexempts’ regular rates when figuring their overtime rates. They include, for example, promised bonuses, such as those announced to employees to induce them to work more efficiently or to remain with the firm; individual or group production bonuses; and bonuses for quality and accuracy of work.

Doing the math

In effect, once the regs become effective on Dec. 1, employees must be paid $821.70 every week—90% of $913. There are several caveats:

  • Incentive payments must be paid quarterly or more frequently
  • If, by the last pay period of a quarter, employees’ weekly salary, plus nondiscretionary bonuses, don’t equal $11,869 (13 × $913), you may make one final true-up payment of the remaining 10%, which brings employees’ salary up to $11,869. True-up payments must be made no later than the next pay period after the close of the quarter, and they may only be counted once, toward that prior quarter’s salary amount
  • If you choose not to make true-up payments, employees would be entitled to overtime pay for any overtime hours worked during that quarter.

Example. Harry is an exempt professional who’s paid weekly. For the first quarter of 2017, he receives $821.70 a week (90% of $913). The remaining $1,186.90 (13 × $91.30), which is paid as a nondiscretionary bonus, must be paid by the first pay period in April.

On your to-do list now

The regs provide a generous amount of time before they become effective, but they become effective when you will be in the middle of your year-end duties, thanks to the new accelerated, consolidated W-2/1099 filing deadlines. Now is the time to determine whether paying nondiscretionary bonuses and other incentive payments is a good option for your company. You will also need to ascertain the changes you must make to your payroll system to accommodate the payment of nondiscretionary bonuses and true-up payments.

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