Calculating Nondiscretionary Bonuses in Regular Rate of Pay

Jul 19 2019 - Compensation - Bianca Saad

Time to break out the calculator!

The U.S. Department of Labor (DOL) recently issued an opinion letter addressing the calculation of quarterly and annual nondiscretionary bonuses as part of the regular rate of pay. Specifically, whether an employer, under the terms of a collective bargaining agreement, may recalculate the regular rate of pay for each workweek of the bonus period by averaging the bonus earnings across the workweeks rather than incorporating the bonuses into the regular rate contemporaneously.

The Scenario

The letter describes how the employer pays a quarterly bonus based on the employee’s straight-time rate and an annual qualification bonus based on the journey straight-time rate. The quarterly bonus consists of:

  • 15 percent of the employee’s contractual straight-time hourly rate for each hour a straight-time rate is earned;
  • 5 percent (1.5 x 15 percent) of the employee’s contractual straight-time hourly rate for each hour an overtime rate (time-and-one-half) is earned; and
  • 75 percent (1.25 x 15 percent) of the employee’s contractual straight-time hourly rate for each hour of a double-time rate is earned.

The annual bonus is 1 percent of the journey straight-time hourly rate for 2,080 hours.

The employer calculates the weekly regular rate of pay without including the quarterly or annual bonus earnings. Instead, the employer retrospectively calculates the weekly regular rate for the bonus period to include the bonus earnings and pays the difference in overtime compensation. In making this recalculation for the quarterly and annual bonuses, the employer averages the bonus earnings across the workweeks of the quarterly or annual bonus period, instead of using the actual bonus earnings in a given workweek.

Arithmetic Fact

For the annual bonus, the DOL explains that the employer should calculate the regular rate for each workweek in the bonus period, after paying the annual bonus; and then pay the overtime compensation due on the annual bonus. However, the employer does not need to include the annual bonus in the regular rate of pay calculation until the employer can determine the weekly amount of bonus at the end of the bonus period. In making the recalculation, the employer must retrospectively include those exact proportionate amounts in the regular rate for each workweek.

For the quarterly bonuses, the employer doesn’t need to recalculate the regular rate of pay for each workweek in the bonus period because a 15 percent bonus of the employee’s straight-time and overtime wages would simultaneously include all overtime compensation due on the bonus as an “arithmetic fact.”

Although this opinion letter is very fact-specific, it may provide some guidance to similarly situated employers subject to the Fair Labor Standards Act (FLSA) with comparable pay practices).

California Employers

In California, the payment of a nondiscretionary bonus to nonexempt employees is included in the regular rate of pay. According to the Division of Labor Standards Enforcement (DLSE) Enforcement Policies and Interpretations Manual (Sec 49.2.4), the exact method for calculating overtime on a nondiscretionary bonus depends on whether it is a:

  • Flat-sum bonus (e.g., $300 for continuing work through the end of the season); or
  • Production bonus, which is “based on a percentage of production or some formula other than a flat amount [which] can be computed and paid with the wages for the pay period to which the bonus is applicable.”

If you use a flat-sum bonus, note that the California Supreme Court approved the DLSE method of calculating the regular rate of pay when a flat-sum bonus is involved, which requires employers to divide the employee’s bonus by nonovertime hours worked (not by the total hours worked). This provides the per-hour value of the bonus, which is multiplied “using 1.5, not 0.5, as the multiplier for determining the employer’s overtime rate” for time and half. Use 2.0 as the multiplier for double time.

Employers who offer their employees nondiscretionary bonuses should evaluate their practices for providing such bonuses, especially when calculating regular rate of pay.

Bianca Saad, Employment Law Subject Matter Expert

CalChamber members can read more on “Regular Rate of Pay Defined” in Calculating Overtime in the HR Library. Not a member? See what a CalChamber membership can do for you.

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