Many organizations provide various types of bonus dollars to their employees. Understanding the rules and calculations for non-exempt employees is critical. If your employee is categorized as a non-exempt employee (eligible for overtime under the Fair Labor Standards Act) there are special rules for calculating overtime to include the dollar amount of the bonus paid.

How do you determine if a bonus must be included in the overtime pay calculation?

Any bonus that is given to an employee as a means of motivating job performance, productivity quality or accuracy must be included in the regular rate of pay for overtime calculation purposes. Examples of these types of bonuses are:

• Commissions
• Incentive pay
• Gain-sharing
• Perfect attendance awards

These are the non-discretionary bonuses where an employee must do something that is measured to receive bonus dollars.

Are there any exceptions to this rule?

Common exceptions include:

• Holiday/gift bonus – excluded as long as it is not linked to hours worked or production results.
• Discretionary bonus – excluded as long as it is not known or announced in advance to serve as a motivator for performance.
• Percentage of total earnings bonus- because the calculation for this bonus uses all overtime paid as part of the total earnings computation, this type of bonus would not need to be factored into the employee’s regular rate of pay.

What is considered a discretionary bonus?

A discretionary bonus is at the sole discretion of the employer to award the bonus, not an expectation by any employee. This could be variable pay, the amount of the bonus, requirements to receive the bonus, timing and announcement of the bonus should not be disclosed in advance. You do not want to imply that meeting certain levels would guarantee a bonus or reward. The employer would determine the amount of the bonus after the fact.

What is considered a non-discretionary bonus?

A non-discretionary bonus has predetermined criteria that is required to receive a bonus. If your employee meets the set criteria, a bonus is paid. An employer’s incentive pay plan that provides additional compensation for exceeding performance or productivity goals is an example of non-discretionary bonus.

How do you calculate overtime pay when a non-discretionary bonus has been paid?

Consider an employee who earns $10.00 per hour. He works 45 hours in a workweek and also received a $25.00 productivity bonus for meeting a goal. (A measurable task.)

First, you would have to determine the total straight time formula that would include all of the hours and bonus dollars earned –

$10.00 X 45 hours = $450.00 + $25.00 production bonus = $475 new rate.

Next you have to determine a new regular rate of pay on an hourly basis

$475.00 (new rate at straight time) / 45 hours worked = $10.55 new base rate

Next you have to determine the new overtime rate =

$10.55 (new base rate) X 1.5 overtime rate = $15.83

Calculating the final earning for 45 hours, and a $25.00 productivity bonus

$10.55 X 40 hours = $422.00
Plus 5 hours of overtime X $15.83 (new OT rate) = $79.15

Total amount paid to employee for this weekly time frame = $501.15 ($422.00 + $79.15)

Many organizations are not aware of this rule when you are providing non-discretionary bonuses to non-exempt employees. This could cost you if your employee discovers that they have not been paid correctly. Ensure that your payroll department understands how to administer this overtime rule.