Bonuses and Gifts Under the Fair Labor Standards Act

William J. Tucker Law > Blog > Employment Law > Bonuses and Gifts Under the Fair Labor Standards Act

All employers know that their “non-exempt” employees (e.g., employees who are not managers or professional personnel) must be paid no less than the minimum wage prescribed by federal and/or state wage and hours laws.  All employers also know that federal and state laws require an employer to pay non-exempt employees 1 ½ times (or sometimes double) their regular hourly rate for all overtime – whether that overtime is measured by the day (more than eight hours) and/or by the week (more than forty hours).

          ARE BONUSES INCLUDED IN AN EMPLOYEE’S “REGULAR RATE?”

          Many employers pay bonuses to their employees, and may not realize that, under most circumstances, bonuses must be considered in calculating an employee’s “regular rate” of pay, which in turn affects the calculation of overtime compensation to which the employees are entitled for work over eight hours a day and/or forty hours a week.  The following is a discussion of the rules applicable to bonuses and gifts under the federal Fair Labor Standards Act (“FLSA”) and regulations promulgated under it.

          The FLSA requires that, with specified exceptions, all compensation paid an employee must be included in the employee’s “regular rate” of pay.  Excluded from the “regular rate” are bonuses “as to which both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement or promise causing the employee to expect such payment regularly.”  FLSA sec. 7(e)(3)(a); 29 CFR sec. 778.211.

          Consider these examples:  An employer announces to the employees at the beginning of the year that he will pay bonuses to employees who, in his estimation, perform services in an exemplary fashion. He does not tell the employees how much the bonuses will be, and in fact, has not yet determined how he will arrive at the amount of bonuses to be paid.  When the bonuses are thereafter paid, they are not exempt and must be included in the employees’ “regular rate” for purposes of determining the hourly rate they are entitled to for any overtime they have worked during the period to which the bonus applied.  The reason these bonuses are not exempt is that the fact of payment is not within the discretion of the employer, even though the amount of the bonuses is within his discretion. 

          Consider another example:  An employer informs his employees that he is considering paying them a bonus at the end of the year, but only if the company’s profits warrant it, and that he will determine in his own discretion whether the company’s profitability warrants the payment of bonuses.  He further tells his employees that any bonuses paid will be computed on the basis of a specified formula, for instance, $1.00 for every widget produced by the employee.  In this example also, the bonuses paid are not exempt from determination of the employee’s regular rate of pay, because the amount of the bonus to be paid is not within the discretion of the employer, even though the fact of payment is within his discretion.

HOW IS AN EMPLOYEE’S “REGULAR RATE’ CALCULATED IF HE RECEIVES A BONUS THAT IS NOT EXCLUDED FROM WAGES?

          When a bonus must be included in an employee’s “regular rate” of pay, how is the employee’s “regular rate” determined?  The first question which must be answered is whether the period to which the bonus applies is known and specified.  If it is, the amount of the bonus must be apportioned back over the work weeks of the period during which the bonus was earned. 

          For instance, if the employer makes it known that bonuses will be paid on an annual basis at the end of the year, the amount of an employee’s bonus must be apportioned among the work weeks during the year.  The amount applicable to a particular week must then be added to the “regular rate” without consideration of the bonus to arrive at the new, higher “regular rate.”  The applicable overtime multiplier (typically 1½, or 2 if double time is applicable) is then applied to the overtime hours worked in that week and the employer must pay the employee the difference between that amount and the lesser overtime amount the employer paid the employee at the end of the pay period for that week. 

          As an example, assume an employee earns $20 an hour and works 50 weeks in the year.  Assume he is not provided with vacation time, but is told he may take whatever time off he wants so long as he gets his work done, and he takes two weeks off during the year.  Thus, there are 50 work weeks during the year. 

Assume the bonus the employee receives at the end of the year is $2,000.  This $2,000 would be apportioned over the 50 work weeks, resulting in $40 being added to each work week.  Assume further that in a particular week, the employee works 50 hours.  For that 50 hours, the employee would have been paid $1,100, based on $20 per hour for 40 hours ($800) plus 10 hours at $300 (1 ½ time) ($300) for a total of $1,100 for that week. 

Since $40 is attributed to that week, the employee’s regular rate for that week is $840 ($800 + $40 = $840).   This $840 is divided by the regular 40-hour work week to arrive at the employee’s “regular rate” for that week of $21 per hour.  Thus, the employee is entitled to $31.50 for each hour of overtime worked during that week ($21 x 1 ½ = $31.50).  Since the employee worked 10 hours’ overtime during that week, he is entitled to $315.00 ($31.50 x 10 = $315.00).  Since the employee was initially paid $300 for those 10 overtime hours, he is now entitled to be paid an additional $15 for those overtime hours ($315 – $300 = $15).  

This type of calculation would be made for every week during which the employee worked overtime to arrive at the additional amount of overtime pay to which he would be  entitled.     

GIFTS ARE EXCLUDED FROM WAGES UNDER THE FLSA

          The FLSA and accompanying regulations also exempt from “wages” payments akin to bonuses, but which are more properly characterized as gifts.  Section 7(e)(1) of the FLSA provides that the term “regular rate” shall not be deemed to include “sums paid as gifts; payments in the nature of gifts paid at Christmas time or on other special occasions, as a reward for service, the amount of which are not measured by or dependent on hours worked, production, or efficiency.”   29 CFR sec. 778.212.  Thus, if the gift is measured by hours worked, productivity or efficiency, it is considered wages for which the employee’s “regular rate” must be determined. 

          If a payment is made at Christmas or on another special occasion, and is not measured by hours worked, productivity or efficiency, it will be considered a gift, even if paid with regularity and the employees are led to expect it.  This is true even if the amounts paid to different employees or groups of employees vary with the amount of salary or regular hourly rate of the employees or according to their length of service with the company.

For further information, feel free to contact The Law Office of William J. Tucker.