What the DOL Guidance on Nondiscretionary Bonuses Means for Nonexempt Employees

A common challenge for employers of hourly or nonexempt employees who receive quarterly or annual nondiscretionary bonuses is how to factor such bonuses into the employees’ regular rates of pay and calculate the appropriate overtime premiums due to those employees who work more than 40 hours in a workweek. In July 2019, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued Opinion Letter FLSA2019-7, which discusses how employers may account for overtime pay as part of annual and quarterly nondiscretionary bonuses.

General Rules Regarding Nondiscretionary Bonuses

The Fair Labor Standards Act (FLSA) defines “regular rate of pay” to include “all remuneration for employment paid to, or on behalf of, the employee” and the term “remuneration” generally includes nondiscretionary bonuses. Because most nondiscretionary bonuses are included in the regular rate of pay, the FLSA might require an employer to pay an overtime premium on a nondiscretionary bonus depending on how the bonus is earned under the employer’s bonus plan. This often requires the employer to recalculate an employee’s regular rate of pay once the bonus is earned and payable, and then pay the employee an increased overtime premium due on the bonus. The opinion letter explains this recalculation process and also highlights certain bonus structures that do not require recalculation because the bonus plan “simultaneously pays overtime compensation due on the bonus.”

The WHD Opinion Letter Applies the General Rules

The opinion letter involves two types of nondiscretionary bonuses: (1) an annual bonus, which equals “1 percent of the journey straight-time hourly rate for 2,080 hours” and (2) a quarterly bonus consisting of multiple parts: (a) 15 percent of the employee’s contractual straight-time hourly rate for each hour a straight-time rate is earned, (b) 22.5 percent (1.5 × 15 percent) of the employee’s contractual straight-time hourly rate for each hour an overtime rate is earned, and (c) 18.75 percent (1.25 × 15 percent) of the employee’s contractual straight-time hourly rate for each hour earned at a double-time rate. The WHD concluded that the quarterly bonus, but not the annual bonus, complied with the FLSA’s overtime requirements.

The Annual Bonus

The WHD concluded that the annual bonus program required recalculation. The WHD explained the bonus program was “not tied to straight-time or overtime hours actually worked, but instead [was] one percent of the journey straight-time hourly rate for 2,080 hours” and that the employer could “readily ascertain the proportionate amount of the annual bonus” earned in each workweek. While the employer permissibly disregarded the bonus in initially computing the regular hourly rate, once the bonus became ascertainable the employer was required to “retrospectively include those exact proportionate amounts in the regular rate for each workweek” and “pay the additional overtime compensation due on the bonus.”

The Quarterly Bonus

For the quarterly bonus, the WHD concluded that the employer need not have recalculated the regular rate for each workweek in the bonus period because the quarterly bonus included payment of all overtime compensation due on the bonus. The quarterly bonus paid 15 percent of the employee’s straight-time hours worked, and also paid 22.5 percent (1.5 × 15 percent) of the overtime hours, and thus complied with the FLSA’s overtime requirements without recalculation.

In addition to approving the quarterly bonus program described in the opinion letter, the DOL provided two additional examples of when recalculation is not required:

• “[A] bonus that is 10 percent of straight-time wages (the contractual hourly rate × straight-time hours worked up to 40) and 10 percent of overtime wages (1.5. × the contractual hourly rate × straight-time hours worked over 40) does not require recalculation of the regular rate because the bonus includes the overtime compensation due on the bonus as an arithmetic fact, fully satisfying the FLSA’s overtime requirements.”
• “[A] bonus that is 10 percent of total compensation—including hourly wages, overtime, bonuses, commissions, etc.—does not require recalculation.”

Key Takeaways

For nonexempt or hourly employees, employers may need to account for any nondiscretionary bonuses paid. Because there are different ways to structure nondiscretionary bonuses—some requiring retroactive recalculation and others not—employers should carefully consider the terms of bonus plan to ensure a generous bonus plan does not lead to significant legal exposure related to FLSA overtime violations.

Josh C. Harrison is of counsel in the Birmingham office of Ogletree Deakins.

Sarah Rawls is a law student, currently participating in the summer associate program in the Birmingham office of Ogletree Deakins.