How does the Fair Labor Standards Act treat bonuses & overtime?

Q. How do bonuses affect the overtime rate calculation under the Fair Labor Standards Act (FLSA)?

A. The FLSA requires that some, but not all, bonuses be included in employees' earnings when calculating the amount of any overtime pay due to them. You must therefore look carefully at the type of bonus you are paying.

Incentive, production and attendance bonuses must be included in an employee's regular rate when calculating overtime pay. For example, bonuses must be included in the employee's regular rate when they are: (1) promised to a newly hired employee; (2) promised in union contracts; or (3) announced to employees as an incentive for them to improve their work.

To be excluded from compensation for overtime pay calculations, bonuses must not be required by any contract, agreement or promise that would cause the employee to expect the bonus payment regularly.

In other words, excludable bonuses must be paid to employees at the employer's sole discretion. Four conditions must be met before this exclusion applies:

1. The employer must have discretion on whether to pay.
2. The employer must have complete discretion as to the amount of the bonus.
3. The employer must retain discretion about the timing of the bonus.
4. The bonus must not be paid pursuant to a previous contract, agreement or promise.

A bonus that is a gift to the employees (e.g., a holiday bonus) can be excluded from overtime calculations only if the bonus is not:

• Paid pursuant to a contract
• So substantial that employees consider it to be part of their wages
• Measured by the employee's hours worked, production or efficiency.

For more information on the Federal Fair Labor Standards Act visit the United States Department of Labor website at www.dol.gov/esa/whd/Flsa.