The Fair Labor Standards Act requires that non-exempt employees be paid at least one and half times their regular rate of pay for all hours worked in a workweek in excess of forty. Whether or not bonuses are included when making the overtime calculation can be a complicated and costly issue. Generally, bonuses are excludable from the regular rate only if the bonus fits into a specific statutory exclusion. The FLSA requires that all of the following elements be met in order for a bonus to not be included in the employee’s regular rate:

1.  The employer must retain discretion as to whether the payment will be made;

2.  The employer must retain discretion as to the amount of the payment;

3.  The employer must retain discretion as to the payment of the bonus until near the end of the period which it covers; and

4.  The bonus must not be paid pursuant to any prior contract, agreement or promise causing the employee to expect such bonus payments.

Bonuses that are provided to employees to induce them to work more steadily or efficiently, or to remain with the employer, must be included in their regular rate. Bonuses that are provided to reward behavior such as attendance and productivity bonuses must be included in the employee’s regular rate of pay and, thus, in the calculation of their overtime pay. Also, a bonus that is paid pursuant to a contract, agreement or promise will almost always be included in the employee’s regular rate.

Whether or not a bonus meets all of these elements can be especially important determination this time of year. For example, if an employer informs its employees that they will be given a bonus of a certain amount or percentage if the employer achieves certain performance goals for the year, that bonus should probably be included in calculating the employees’ overtime compensation. Alternatively, if an employer merely tells employees that it may pay bonuses at year end, and it retains total discretion regarding the amount, if any, of the bonuses, then the bonuses should not be included in calculating the employee’s overtime compensation. Christmas bonuses usually fall into this category.

The United States Department of Labor has become much more aggressive in looking for errors of this type in the past few years. And, while an employer’s failure to include a bonus in its employees’ overtime calculations may not be overly expensive in itself, this error will often cause the DOL to conduct a more thorough audit in order to find other, more costly, errors. In addition, if an employee quits or is fired and the employer improperly fails to include his bonus in its overtime calculation, the employer will be in violation of Louisiana’s “Pay Day” statute, requiring that all monies owed to an employee be paid within fifteen days of his separation.

The key to avoiding liability when dealing with bonuses is to ensure that your bonus program complies with all of the requirements of the FLSA so that it does not have to be included in your employee’s regular rate of pay for overtime pay calculations.