Professional Service Agreement

Adopting Bonus Plans That Comply With The FLSA

July 30, 2018

Recruiting and retaining employees has become a bigger challenge for many employers as the already robust U.S. economy has continued gaining steam. Unemployment rates have reached their lowest levels since the tech boom of 2000, and competition for workers has increased significantly in many sectors. To respond to the growing demand for talent, many companies have recently adopted bonus plans to reward employees for their job performance and loyalty. While these plans are well intended, they can also create liability under the Fair Labor Standards Act (“FLSA”) when not properly implemented. Below is a brief summary of factors employers should take into account when adopting bonus plans to ensure that they are administered in accordance with the FLSA.

The FLSA requires employers to pay non-exempt employees overtime pay at one-half times the employee’s “regular rate” of pay for all hours worked over 40 in a workweek. While covered employers are surely familiar with this rule, the unwary can overlook the fact that “non-discretionary” bonuses qualify as wages and must be included in the regular rate for overtime purposes. 29 C.F.R. § 778.209(a). Most bonuses qualify as non-discretionary and must be included in the regular rate for overtime purposes. Non-discretionary bonuses include those that are intended to induce employees to work more rapidly, to hit production goals, to attend work, to remain employed with the company, etc. 29 C.F.R. § 778.211(c).

The only bonuses excluded from the regular rate and not considered for overtime purposes are those that are truly “discretionary.” According to the regulations, a discretionary bonus is one that is made at the employer’s sole discretion as to both timing and amount. 29 C.F.R. § 778.211(b).

Employers are free to establish bonuses that are earned weekly, monthly, or annually. Under many bonus plans, employers are incapable of immediately allocating bonus earning over the bonus period. The regulations provide for this reality and permit employers to account retroactively for the bonus. To perform this “true up,” the employer would generally divide the bonus amount by the number of workweeks included in the bonus period and then recalculate the employee’s regular rate and overtime premium for each respective workweek in which the employee had worked overtime. 29 C.F.R. § 778.209(b).

Please note that many states have their own overtime laws, which can differ slightly from the FLSA. Accordingly, when implementing any bonus program, an employer should ensure that it complies with all applicable state and local laws, in addition to the FLSA.

While bonus plans can be a useful tool for motivating and retaining workers, it is a mistake for employers to adopt such plans without first determining how it will comply with the FLSA. The prudent employer will first review and understand the obligations for compliance, which is far less costly than defending a lawsuit alleging an overtime violation.