Design bonus payments to reduce your overtime costs

SEQ CHAPTER h r 1 SEQ CHAPTER h r 1If your company dishes out discretionary bonuses during the year, it may be paying out more overtime than necessary.  

The Fair Labor Standards Act (FLSA) requires 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 pay.  

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 management 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.”