One of the most frequently violated provisions of the Fair Labor Standards Act involves the effect of bonuses or other incentive compensation on the rate used to calculate overtime. For non-exempt employees, the employer must include such incentive pay when determining the regular rate from which the time and one-half overtime rate is derived. However, under the FLSA purely discretionary bonuses can be excluded from the regular rate.

Last week, the Fifth Circuit Court of Appeals considered a novel legal question during a dispute over whether certain bonuses were discretionary in nature. In Edwards v. 4JLJ, LLC, oil workers received both “stage” bonuses paid at various points in the extraction process, as well as incentive bonuses paid according to a written plan. They contended that both bonuses were non-discretionary and should have been included in their regular overtime rate. The court eventually held that the stage bonus was discretionary in nature, while the incentive bonus was not.

The novel part of the decision involved the Fifth Circuit’s conclusion that under the FLSA, the plaintiff bears the burden of proving the non-discretionary nature of the bonus. For employers, this means that employees who file collective action overtime claims face an additional hurdle in terms of their ability to prove liability. In most cases, it will require significant discovery efforts to meet this burden, including detailing the internal company deliberations that determine how bonuses are awarded.