K. Bonuses and Incentives and Exclusions

Regular Rate Includes Certain Bonuses and Incentives; Exclusions from Regular Rate

Many employers pay bonuses or give certain incentives to employees without realizing that such payments must be reflected in the regular rate for overtime pay purposes. Section 207(e) of the Act states that the regular rate includes all remuneration for employment except eight specified types of payments:

  1. gifts and payments in the nature of gifts on special occasions;

  2. vacation, sick, and other leave pay, reasonable expense reimbursements, and other types of payments that are not made as compensation for work;

  3. discretionary bonuses, contributions to certain profit-sharing, thrift, and savings plans, and talent fees;

  4. contributions irrevocably made by an employer to a trustee or third party pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees;

  5. extra pay at a premium rate for hours in excess of eight per day or 40 per week, or for hours in excess of an agreed schedule;

  6. extra pay at a premium rate paid for work on Saturdays, Sundays, holidays, or regular days of rest, if the premium rate is not less than one and one-half times the employee's non-overtime pay rate;

  7. extra pay at a premium rate paid for work that falls outside of a schedule established in an employment contract or collective bargaining agreement, if the premium rate is not less than one and one-half times the rate paid for work performed during the employee's normal workday or workweek; or

  8. any value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program. (This provision, Section 207(e)(8), became effective in 2000.)

As seen in item 3 above, a discretionary bonus does not need to be included in the regular rate. In order to be considered "discretionary", the employer must retain discretion over two things: whether the bonus will be paid at all, and the amount of the bonus (see 29 C.F.R. 778.211(b)). Bonuses in the form of gifts for special occasions are also discretionary and excludable from the regular rate. Bonuses that are non-discretionary, i.e., are somehow promised so that an employee has the right to expect the payment, must be totaled in with other earnings to determine the regular rate on which overtime pay must be based.

The ways to figure bonuses into the regular rate are covered in 29 C.F.R. 778.209. A bonus, much like a commission paid in addition to an hourly wage or salary, is simply a form of additional straight-time pay for hours an employee has already worked. If the bonus is paid on a weekly basis, the bonus is simply added to the straight-time earnings for the week, and the total is divided by the hours worked to get the regular rate of pay. It is more complicated if a bonus is paid for a longer period of time. In such a case, the bonus must be allocated over the workweeks corresponding to the bonus. If any of those workweeks had overtime hours, extra overtime pay would have to be paid corresponding to the increase in the regular rate due to the bonus. The simplest way allowed under the regulations, assuming that the bonus is given to cover an entire quarter, or half-year, or year, is to allocate the bonus equally over each workweek in that period. For a workweek with overtime hours, the extra overtime pay would be equal to one-half of the increase in the regular rate due to the bonus, multiplied by the number of overtime hours that week. (The regular rate increase only needs to be multiplied by one-half because the bonus allocation itself represents the straight-time payment - adding the two together results in the payment of time and a half.)

Under Section 207(h)(2) of the Act, payments excluded from the regular rate of pay under subsections (5), (6), and (7) of Section 207(e) above may be credited toward the payment of any overtime pay that is due for that workweek.

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