Let's say you own a small business and things are going well. Your employees are happy since they are receiving plenty of overtime, as well as bonuses for the safety compliance and increased production.
This is either a good scenario or a legally risky scenario. The difference depends on a technicality under the Fair Labor Standards Act (FLSA).
First, a bit of background. The FLSA is the law containing minimum wage and overtime pay obligations. There are exemptions for certain types of employees, such as professional, executive, administrative, and outside sales employees.
Teachers, for example, are classified as exempt-level professional employees, and thus can be paid a salary with no overtime.
In our small business example, let's presume most of the employees are hourly production workers. This means they are nonexempt and must be paid overtime.
The FLSA requires that nonexempt employees be paid overtime for all hours worked over 40 in a work week. Most people are familiar with this concept and know that overtime hours are paid at time and a half.
This begs the question: time and a half of what?
Here is the technicality. Overtime pay is time and a half of "the regular rate," and "the regular rate" does not strictly mean the employee's standard hourly rate.
Under the FLSA, the regular rate generally includes "all remuneration for employment." Bonuses (with limited exceptions) are included in the regular rate calculation, and as a result, bonuses will increase the overtime pay rate.
Unfortunately, not all payroll systems are set up to catch this discrepancy.
In our small business example, if the payroll system does not recognize that safety and production bonuses make the regular rate go up, then overtime hours will be calculated at the wrong rate and will be underpaid. If employees are working a lot of overtime, the underpayment (and associated liability risk) can be surprisingly large.
Unfortunately, where payroll systems are lacking, plaintiff's law firms are vigilant. There are a plethora of firms seeking to file lawsuits over technical FLSA violations.
So, what is a cautious employer to do? Here are some suggestions:
- Review the Bonus Technicality. If you pay bonuses (or shift differentials or other extra compensation), ensure compliance with applicable FLSA regulations. Bonuses that are promised based on specific criteria will almost certainly affect employees' regular rate for overtime purposes.
- Ensure Holiday Bonuses Meet the Criteria. There is a regulation (29 CFR §778.212) for "gifts, Christmas and special occasion bonuses." These do not affect the regular rate calculation so long as they are truly gifts and are not tied to hours worked, production, or efficiency. So go ahead and be generous at year end.
- Consider a Percentage-Based Bonus. There are regulations (29 CFR §778.210 and §778.503) acknowledging that if a bonus is paid as a percentage of total wages, overtime has been properly paid as an arithmetic fact.
- Review overall FLSA Compliance. There are many other technicalities that can lead to FLSA lawsuits. These include misclassification of employees as exempt and timekeeping violations involving meal periods, accuracy of time records, and working "off the clock." Ensure human resource personnel are monitoring these issues, and when in doubt, consult legal counsel.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
