The U.S. Department of Labor issued an interesting opinion letter earlier this month that I encourage employers who pay hourly employees bonuses to read (click here to do that). The letter is a reminder that bonuses may need to be included as part of an employee’s hourly wage when you are calculating how much overtime pay that employee is due.
The Fair Labor Standards Act requires employers to pay employees making less than $35,568 a year 1.5 times their hourly rate of pay if they work overtime (more than 40 hours per week). This hourly rate includes non-discretionary bonuses (i.e. bonuses that the employer must pay the employee). It does not include discretionary bonuses (i.e. bonuses that the employer chooses to pay the employee because the employee performed well, the employer had a good year, etc.).
This means that if an employer promises to pay an hourly employee a $3,000 bonus at the end of the year, this bonus must be included as part of the employee’s hourly rate. So if the employee worked 2,000 hours during the year, and makes $10/hr, the employer should not pay the employee $15/hr for overtime work (1.5 * $10/hr). Instead, the employer should consider the employee’s hourly rate to be $11.50 per hour. The $3,000 bonus must be added to the employee’s hourly wage, increasing it by $1.50 per hour ($3,000/2,000=$1.50). The employee’s overtime pay should, therefore, be $17.25 ($11.50*1.5).
Employers who want to avoid any confusion about how much they need to pay their hourly employees, or who just hate math, should include in their personnel policies and employment contracts provisions explaining that any bonuses paid are at the discretion of the employer and that bonuses are not considered part of the employee’s regular pay.