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Your organization is modifying its incentive compensation approach and is looking at a couple of bonus programs. One question that has been asked is what impact, if any, these anticipated bonus plans could have on your overtime pay liability.
1. Everyone but recent hires receives a bonus if the company exceeds base-line financial goals for the previous calendar year. Bonuses and eligibility criteria are announced in advance, and amounts are based on the ratio of individual earnings to total employee earnings.
2. A “Team Bonus Plan” promises bonuses to sales personnel based on the amounts by which they exceed monthly sales targets. Eligibility criteria are set at the start of the year. However, management reserves the right to withhold bonuses in “extraordinary circumstances” and once did so due to serious employee misconduct.
Must these bonuses be factored into regular-rate calculations when computing overtime pay?
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Answer: |
Yes. Both bonus plans call for incentive payments that must be included as a part of the regular rate for overtime-pay purposes. These incentive payments are nondiscretionary in nature both as to the fact of payment and the amount. In effect, each plan promises the bonuses in advance based on communicated eligibility criteria and established calculation methods.
Unlike promised incentive bonuses, discretionary bonuses may be excluded from the regular rate. The employee has no contractual right to the bonus. However, the employer must retain discretion both as to whether the bonus is paid and how much it will pay, at least until a time quite close to the end of the period for which the bonus is paid. When the employer promises the bonus, it surrenders discretion regarding the fact of payment.
In situation #2 above, the “extraordinary circumstances” part of the plan does not vest the employer with sufficient discretion to justify excluding the bonus from the regular rate. The discretion must exist, not only in theory, but also in practice. A rare withholding due to serious misconduct does not really alter the nondiscretionary nature of the plan. The bonus is paid so regularly and consistently that there is an understanding on the part of the employees that they will receive it.
Source: W & H Opinion Letters, FLSA2006-5NA and -9NA, April 27 and May 11, 2006, CCH WAGES HOURS REPORTER, 05-08 CCH WH ¶31,385 and ¶31,391.
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