Under the federal Fair Labor Standards Act, non-exempt employees are entitled to the premium overtime rate of 1-1/2 times their regular rate of pay for all hours worked past 40 in a single workweek. The regular rate of pay is determined by adding up all earnings, including non-discretionary bonuses and some other payments, and dividing by the number of hours worked.
What other payments have to be included? According to the Department of Labor, this question has resulted in excess litigation and so should be clarified. Employers incentivize and remunerate their employees in many ways, including both monetary rewards and other benefits. Increasingly, they are also offering non-traditional compensation, ranging from reimbursing rides through ride-hailing services to offering private equity pay.
According to the Society for Human Resource Management, employers have questioned whether payments and benefits like these must be included in the overtime calculation:
- Discretionary bonuses
- Premium payments when employees work outside their regular work hours
- Vacation or holiday pay
- Irrevocable benefits payments
- Small incentives like point redemption programs
- Gym reimbursements
- Travel, lodging and meal allowances
- Tuition reimbursement
- Extra compensation paid according to a collective bargaining agreement or private agreement
- Income from grants or options
Much of the litigation has involved determining whether a bonus is non-discretionary and must therefore be included in the calculation, or discretionary, in which case it is not included. Under current law, non-discretionary bonuses must be included in the calculation of an employee's regular rate of pay. According to the DOL, very few bonuses are considered discretionary. One example is the referral bonus, as long as the referral process is voluntary and uncomplicated and the recruitment is limited to after-hours solicitation of friends, relatives, neighbors and acquaintances.
Non-discretionary bonuses are those that encourage employees to work more rapidly, efficiently or steadily. These are typically offered with specific rules for achieving the bonus, and if the employee achieves the bonus, the employer must pay it. Similarly, bonuses based on shift differentials must be included in the calculation.
The upcoming rule, which is expected this month, may give employers greater clarity on which types of payments to employees are considered part of their regular pay and which are not. It may also provide insight into how newer types of compensation should be handled. We will be sure to update this blog when the final rule is released.
In the meantime, if you have questions about how to calculate your employees' regular and overtime rates, discuss your situation with an experienced employment law attorney.