If you answered “no,” chances are you are violating the Fair Labor Standards Act (FLSA). The FLSA is the federal law that requires employers to pay overtime at the rate of 1.5 times an employee’s “regular rate” of pay. You’re probably thinking, “I already do that!” But the key is in how the FLSA calculates the “regular rate.” It’s not simply the employee’s hourly rate of pay. The “regular rate” is calculated by taking all amounts earned during a workweek divided by the hours worked in that workweek.* That includes all non-discretionary bonuses, like attendance bonuses, bonuses for meeting a goal, and bonuses because an employee did something to earn it.
For example, let’s say you pay a bonus of $100 each 2 week pay period for perfect attendance. Employee A makes $10/hour, worked 48 hours each week of the pay period, and earned the $100 bonus. What must you pay Employee A at the end of the pay period? Let’s start with calculating the “regular rate.” Since Employee A earned $100 for perfect attendance over the 2-week pay period, we have to apportion the bonus across the 2 weeks: Employee A earned $50 of the bonus per week. Here’s how to calculate the regular rate:
|Straight time (ST) compensation:||48 hours x $10/hr = $480|
|Total ST compensation for week 1:||$530|
|Regular rate:||$530 ÷ 48 hours = 11.04/hour|
Notice that the regular rate is $1.04 higher than Employee A’s $10 hourly rate. Without properly calculating the regular rate, you could be significantly underpaying your employees. Now, let’s use this regular rate versus the hourly rate to calculate the difference in Employee A’s earnings:
||With Regular Rate||With Hourly Rate|
|Pay rate||$530 ÷ 48 hours = $11.04/hour||$10/hour|
|Week 1||40 (straight time hours) x $11.04 = $441.60
8 (OT hours) x ($11.04 x 1.5) = $132.48
Total = $574.08
|40 (straight time hours) x $10 = $400
8 (OT hours) x ($10 x 1.5) = $120
Total = $520.00
Sound like too much math? Luckily, there’s a way to keep your bonus program without having to become a mathlete: use a percentage bonus. The U.S. Department of Labor has recognized that a bonus based on a percentage of an employee’s total earnings for the bonus period does not require you to include the bonus in the regular rate. Why? Because a bonus based on total earnings mathematically accounts for straight time and overtime pay. Using the example from above, if you offered Employee A a 10% bonus instead of $100, you simply calculate Employee A’s total earnings for the pay period using Employee A’s hourly rate, which is $1,040 as calculated above. Employee A then receives $104 as the 10% bonus, which is roughly what Employee A would have received, no confusing math required!
*Please note that this is the FLSA’s definition. A state’s wage and hour laws may define and calculate the “regular rate” differently (e.g., California). Always ensure that you check state law to ensure that there are no differences.
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