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Percentage of Wage Bonus Plan Can Avoid Retroactive Overtime Calculations

    Client Alerts
  • January 04, 2017

Many employers are approaching the time when annual incentive bonuses are calculated and paid to employees. For non-exempt employees subject to the overtime provisions of the Fair Labor Standards Act (FLSA), employers must accompany the bonus payment with a recalculation of overtime worked during the bonus period. The employer must allocate the bonus over that time period, and recalculate the employee’s overtime rate with the added bonus amount. This usually results in a small amount of additional pay along with the bonus based on the effect of adding the allocated bonus to the employee’s regular rate of pay used to calculate overtime.

This requirement is probably the most commonly ignored provision in the FLSA. Employers regularly pay non-exempt employees incentive bonuses without making the overtime correction. For employers that attempt to comply with this requirement, the allocation and recalculation can prove daunting. In most cases, the regular rate must be corrected for each week worked during the bonus period.

Employers that wish to avoid this administrative payroll burden have another option. Under Department of Labor regulations (49 C.F.R. §778.210), employers can pay a “percentage of wage” bonus that requires no recalculation when overtime is paid. Under this method, the bonus is paid as a percentage of the employee’s total (meaning straight time plus overtime) wages earned over the bonus period. For example, if an employee achieves certain production targets, he receives one percent of wages earned that year, and two percent for a higher level. Because overtime is included in the percentage payment, the bonus already includes the “bump” attributable to overtime worked during that time period.

Some employers fear that a percentage of wage bonus rewards less efficient employees who work more overtime to get the same job done. However, the allocation calculation described above ends up having the same effect. Percentage of wage bonuses are not right for every employer, but they provide a good alternative for companies that find the bonus recalculation too burdensome.