Employers commonly use bonuses and other incentives to increase productivity or reward employees. However, many employers and employees do not realize that bonuses can increase the amount owed to the employee for overtime.
Only nonexempt employees get overtime. Most employees who work more than 40 hours per week are eligible for overtime under the Fair Labor Standards Act (FLSA)1 and the state Minimum Wage Act (MWA).2 Employees who are eligible for overtime are "nonexempt" employees. Employees who are exempt from the overtime laws (and who are not affected by this article) include, among others, certain administrative, executive and professional employees.3
Employee compensation must be converted to an hourly rate. To determine the amount of overtime pay a nonexempt employee receives, the employee's "regular rate" must be calculated. As used in the FLSA, the "regular rate" at which an employee is employed shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee, with certain exceptions that are enumerated in the statutes and regulations.4
If the only compensation the employee receives is an hourly rate, this calculation is very straightforward, as the hourly rate is the "regular rate." If the employee receives a monthly or annual salary, that amount needs to be converted to an hourly rate to determine the "regular rate."
Including bonuses in the regular rate. Bonuses complicate matters because they may need to be converted to an hourly rate and added to the employee's "regular rate" for the purposes of calculating overtime.5 A bonus needs to be included in a nonexempt employee's "regular rate" for overtime purposes if the bonus is a promotional "push" award for selling certain products or if it is promised for accuracy of work, good attendance, continuation of the employment relationship, incentive, production or quality of work.7
Discretionary bonuses (holiday bonuses), however, do not need to be included in the employee's regular rate for overtime purposes.7 If an employer tells employees that they will get a bonus, but that the employer does not know how much it will be, then the bonus is not discretionary. In other words, if you don't promise employees that they will get a bonus and you don't tell them how much it will be, then it does not need to be included in the overtime calculation.
Treatment of other incentive payments. Other types of incentive payments also must be included in the regular rate. In Hisle v. Todd Pacific Shipyards Corp.,8 the union and the employer agreed to a retroactive incentive payment for executing a collective bargaining agreement, and the Washington Supreme Court held that this payment needed to be included in the employee's "regular rate" for overtime purposes:
We agree with Hisle and find that the retroactive payment contained in the new CBA is tied to hours worked and, therefore, is subject to the overtime provisions of the MWA. We reject Todd's and PSMTC's assertion that the payment was a ratification inducement. The CBA to which they stipulated, and which the arbitrator ordered, makes no indication that the payment is a ratification inducement, lists the hourly retroactive payment increases under the heading "Wage and Fringe Increase," and specifically ties the hourly retroactive payment to hours worked. But even if properly characterized as a ratification inducement, under the facts of this case, the retroactive payment is subject to the MWA overtime provisions.
There are also other payments that need to be added to an employee's "regular rate" for overtime purposes, such as non-overtime premiums and on-call pay, which are described in the regulations cited elsewhere in this article.
The bottom line. In short, employers who use bonuses and other incentive payments to motivate or reward their employees need to be aware of the additional cost of these incentives if their nonexempt employees work overtime. For example, a promise of a year-end bonus if the business meets certain annual goals would require retroactive recalculation of overtime pay to include the bonus in the employee's "regular rate."
The effect of these statutes and regulations, both in terms of additional overtime compensation and the time necessary to do the accounting, should be taken into account by employers in developing monetary employee incentives.
Karen Sutherland is the chair of the Bar Bulletin Committee and the chair of the Labor and Employment Law Practice Group of Ogden Murphy Wallace, P.L.L.C. The overtime laws are very complicated, and this article is a brief overview. Sutherland can be contacted at ksutherland@omwlaw.com.
1 29 USC ¤ 201 et seq. and 29 CFR 510.794.
2 E.g., RCW Ch. 49.46 and WAC 296-128.
3 See, e.g., RCW 49.46.010(5).
4 E.g., 29 CFR 778.200.
5 E.g., 29 CFR 548.30; 29 CFR 548.100Ð548.502.
6 See, e.g., Section 7e of the FLSA; 29 CFR 548.502; 29 CFR 778, subpart C; and www.lni.wa.gov/WorkplaceRights/files/policies/esa81.pdf.
7 Id.
8b 151 Wn. 2d 853, 862Ð63, 93 P.3d 108 (2004).
