We've received many questions regarding the Department of Labor's (DOL) proposed rule regarding "discretionary bonuses" in relation to an employee's overtime (OT) rate.

Quick background: Under the Fair Labor Standards Act (FLSA), an hourly employee's OT rate is one and one-half times the employee's "regular rate of pay." The question is: what types of compensation are included in an employee's "regular rate of pay" in addition to the base pay rate? 

The DOL recently clarified (in a proposed rule) that certain forms of compensation do not need to be included in an employee's regular rate of pay to reach the new (higher) OT rate.  Specifically:

  • the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services;

  • payments for unused paid leave, including paid sick leave;

  • reimbursed expenses, even if not incurred "solely" for the employer's benefit;

  • reimbursed travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;

  • discretionary bonuses;

  • benefit plans, including accident, unemployment, and legal services; and

  • tuition programs, such as reimbursement programs or repayment of educational debt.

Beware: While most of our clients' incentive plans and bonus programs state the employer "maintains the discretion to change or terminate the bonus plan or program," this language does not make the bonuses "discretionary" for purposes of the FLSA.   

To be a "discretionary" bonus, the employer must retain 100% discretion as to (1) whether and when any bonus will be paid, and (2) the amount of the bonus.  If the employer promises a certain bonus amount (or commission-based incentive) if an employee meets certain goals or expectations, the bonus is not discretionary. To be discretionary, there should be no expectation of payment from the employee (e.g., "Surprise, we decided to give everyone $100 because the company did well this year!")

In sum, if your employees receive bonuses based upon hitting performance targets or attendance goals, these are "non-discretionary" bonuses that must be factored into the regular rate of pay to determine the new, higher OT rate. Any violation of this rule can result in class action liability.

Confused? Don't worry. We're here to help!

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