How to Ensure Compliance with a Non-discretionary Bonus

by | 30 Apr, 2019

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There is not a single employer that does not have to contend with compliance issues in the workplace. One area that is especially tricky is the payment of bonuses. The Fair Labor Standards Act is the main law that regulates the payment of wages to employees, and there are a few sections that, if overlooked, can land employers in hot water. In this blog post, we will be focusing on how to ensure compliance when paying out bonuses and calculating a non-exempt employee’s wages.

There are different protections for exempt versus non-exempt employees under the FLSA. Non-exempt employees are entitled to minimum wage and overtime pay. The FLSA dictates that nonexempt employees must be paid for each hour that they work and 1.5x their regular pay rate for any hour worked that exceeds those first 40 hours. The regular pay rate must include all payments made to the employee during the period in question, including incentive pay and most bonuses.

To make matters just a little bit more complicated, not all bonuses need to be factored into the regular rate of pay before calculating overtime pay. The FLSA does not require discretionary bonuses to be factored in, but they do require non-discretionary bonuses to be factored in?

Discretionary versus non-discretionary bonuses

A discretionary bonus is a bonus in which the employer determines the payment without any prior promise or agreement. Thus, the employee has no right, whether stated or implied, to any specific amount. These types of payments usually come as a surprise to employees and are paid towards the end of a bonus period. An example of a discretionary bonus is a year-end bonus as a result of company-wide increased sales in the final quarter.

A non-discretionary bonus is one that is predetermined by specific criteria that must be met in order to receive the bonus, such as a hiring bonus, attendance bonuses, individual production bonuses, etc. These bonuses are typically used to incentivize employees to perform better and expressed at the outset of a pay period.

As stated previously, only non-discretionary bonuses need to be factored into the regular rate of pay to determine to overtime rate of pay for non-exempt employees. But how exactly is that done?

Factoring non-discretionary bonuses into overtime pay

If the employer can determine the exact week that the employee earned the bonus, the employer should retroactively attribute the bonus to the employee’s wages for that week. If the employer cannot determine the exact week the bonus was paid, then the bonus should be allocated evenly over the entire bonus period.

In the instance of a bonus earned during a specific week, the employer take the employee’s earnings for the week and add the bonus to get the total earnings for the week.

The employer will then divide the total earnings for the week by the total hours worked that week to get the regular rate of pay.

Finally, the employer will multiply the regular rate of pay by 1.5 to determine the overtime pay rate.

Are you a bit confused by all of this? If so, you’re not alone. Many employers struggle to keep up with all the complex regulations and considerations that they need to factor into the payroll process. Luckily, you don’t have to struggle alone.
Here at Navigate, we help business owners to manage payroll while ensuring compliance. Want to learn how Navigate can help you tackle issues like this so that you can focus on the more important task at hand: growing your business? Contact us today for a free consultation.

Leah Bury
Leah Bury was former Marketing Manager at Navigate PEO, and holds a BS from Northeastern University. She contributed pieces and HR tips and created The Compass, our monthly newsletter!

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.