Do Bonuses Have to be Included in an Employee’s "Regular Rate?"

It is always nice when an employer gives their employees a bonus. However the employer needs to be aware that some bonuses need to be calculated into the employee's regular rate. There are two types on bonuses that need to be considered when making this determination. The first one is a discretionary bonus. CFR § 778.211(b) states that this type of bonus does not need to be factored into the employee's regular rate and is excluded. According the rule "In order for a bonus to qualify for exclusion as a discretionary bonus under section 7(e)(3)(a) the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount." The bonus is at the discretion on the employer. They decide the time it is to be awarded, and how much. This bonus is not disclosed to the employees ahead of time. An example of this type of bonus would be a holiday bonus.

Once the bonus is promised to the employee, it becomes a nondiscretionary bonus. CFR §551.514 (a) states "When an employee earns a nondiscretionary cash award or bonus (as opposed to discretionary cash awards or bonuses as described in § 551.511(b)(3)), the bonus must be taken into account in determining overtime pay for the period of time during which the bonus was earned." With this type of bonus the employer set what the bonus is going to be, how to earn this bonus and when the bonus will be given. For example, a store needs to sell 1,000 widgets by June. The Store Manager announces to all the employees that the person that sells the most widgets gets a $500.00 bonus at the end of June. This type of bonus is considered nondiscretionary and would need to be calculated into the employee's regular rate. There are many different ways that this can be done depending on the type of bonus that is given.

At Watkins & Letofsky, LLP, our attorneys support human resources departments with the experienced legal counsel they need to navigate complex employment law matters. Our clients include human resources staff from a broad range of employers, including corporations; limited liability companies (LLCs), nonprofit organizations and municipalities in diverse industries. For a free consultation call our office toll free at 866-439-1295.