Calculating the “regular rate” of pay:

Section 7 of the Fair Labor Standards Act (FLSA) requires an employer to pay one and one-half times an employee’s “regular rate” of pay for hours worked over 40 in a workweek. That “regular rate” includes all “remuneration for employment” and specifically includes nondiscretionary bonuses.

Nondiscretionary bonuses are bonuses announced by an employer, in advance, to induce a non-exempt (typically hourly) employee to take a specific action.

When such a bonus is attached to one week, calculating the regular rate is not complicated: the employer multiplies the employee’s standard hourly rate by the number of hours worked for that week, adds the discretionary bonus amount to that result, and then divides that total compensation number by the total hours worked to get the “regular rate” for the workweek. Employees are entitled to be paid the “regular rate” for each of the first 40 hours worked that week, and 1.5 times that regular rate for each overtime hour worked in the week.

But what if the bonus is for a multiple week period, and it’s impossible to allocate the full bonus to a particular week?

DOL’s recent Opinion Letter on discretionary bonuses:

That issue was addressed by the Department of Labor (DOL) on January 7, 2020, in the Wage & Hour Division’s first Opinion Letter of the year. In that Opinion Letter, the Administrator set forth the method for calculating the regular rate of an hourly employee who worked irregular periods of overtime during that employee’s probationary period, when the bonus applied to the full period. Opinion Letter FLSA2020-1, January 7, 2020.

In that circumstance, the employer agreed to pay a $3,000 lump sum to probationary employees who successfully complete a 10-week training period. As an additional precondition to the bonus, the employee was required to agree to remain with the employer for an additional unspecified training period. However, the employee did not have to complete any specific period of additional training after the initial 10 weeks in order to collect the $3,000 bonus.

Based on the facts submitted, the DOL set forth the following assertions in its Opinion Letter:

  • The lump sum bonus should be allocated to the initial 10-week training period only; and
  • It is appropriate to allocate the lump sum bonus equally to each week of the 10-week training period, since each week counts equally in fulfilling the bonus criteria.

The overtime calculation and total earnings:

Therefore, in this particular instance, here are the steps to take to calculate the overtime pay:

  1. Determine amount of bonus to include: attribute $300 of the bonus ($3,000 divided by the 10 weeks) to each workweek;
  2. Determine the total straight time compensation for each overtime week: multiply the employee’s standard hourly rate by the actual hours worked, including overtime hours, within the workweek during which overtime was worked (straight time compensation = total hours worked x standard rate + attributable bonus);
  3. Calculate the new “regular rate” of pay: divide that straight time compensation total by the number of hours worked within that workweek (including overtime hours), which results in the new regular rate for that particular workweek;
  4. Calculate the overtime rate of pay: take the new regular rate of pay and multiply it by 1.5 – this is the overtime rate;
  5. NOW calculate the total earnings: start with straight time earnings, using the new regular rate (straight time earnings = new regular rate x straight time hours worked); then, calculate the overtime earnings (overtime earnings = new overtime rate x overtime hours worked within the calculation period); add those numbers together (total earnings = straight time earnings plus overtime earnings).

This is complicated – really complicated for some of us. But it’s the only way to assure that employees are being paid in a way consistent with the FLSA’s requirements.

The bottom line – and the critical reminder for employers – is that retroactive overtime payments must be made for non-exempt employees who work more than 40 hours in any workweek for which a non-discretionary bonus is paid. Recent and ongoing changes in the FLSA makes this an issue of which employers should be aware, as (based on this early Opinion Letter) it is an issue on which the DOL’s Wage & Hour Division is focusing attention in 2020.