How to Calculate Overtime Pay – Accounting for a Lump Sum Bonus

The Department of Labor has released its answer to a question submitted regarding the proper method for calculating overtime pay for a nondiscretionary lump sum bonus under the Fair Labor Standards Act (FLSA).  The answer is important to workers because it directly impacts the base rate (“regular rate”) from which their overtime pay rate is derived. The short answer is that a) nondiscretionary bonuses must be included when determining a worker’s regular rate of pay on which overtime is calculated and b) under the circumstances, the lump sum bonus could be divided equally across the workweeks for which it was intended to compensate.

The circumstances involved an employer that informs its employees in advance that they will be eligible to receive a lump sum bonus of $3,000 if they successfully complete ten weeks of training and agree to continue training for an additional eight weeks. The scenario included an employee working 40 hours per week during eight weeks of the ten-week training period, but in week 5, they work 47 hours and in week 9, they work 48 hours. The employer wants to know which of the two methods of computing overtime pay for bonus earnings that cannot be identified with particular workweeks should be used to calculate the overtime payments resulting from the nondiscretionary lump sum bonus.

The following are some key excerpts from the opinion.

The federal overtime rules require an employer to pay not less than one and one-half times the employee’s regular rate for hours worked over 40 in a workweek. The FLSA defines the “regular rate” to include “all remuneration for employment paid to, or on behalf of, the employee,” excluding certain types of compensation provided in Section 7(e) of the FLSA. Nondiscretionary bonuses count as “remuneration” that an employer must include in the regular rate of pay. Bonuses which are announced to employees to induce them to … remain with the firm are regarded as part of the regular rate of pay.” For example, “bonuses [that are] contingent upon the employee’s continuing in employment until the time the payment is to be made …. must be included in the regular rate of pay.”  Such bonuses are considered nondiscretionary.

The regulations provide that “if the bonus covers only one weekly pay period,” the bonus amount is added to the employee’s other earnings and the total earnings are divided by total hours worked. If the bonus covers a longer period and “[if] it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week,” the employer may “assume that the employee earned an equal amount of bonus each week of the period to which the bonus relates ….”  If, however, “there are facts which make it inappropriate to assume equal bonus earnings for each workweek,” the employer may “assume that the employee earned an equal amount of bonus each hour of the pay period.”

The lump sum bonus paid to employees must be included in the regular rate of pay as it is an inducement for employees to complete the ten-week training period. A “Stay Bonus” that encourages employees to remain with the firm is a nondiscretionary bonus that must be included in the regular rate of pay.

Because the employer pays the lump sum bonus to employees for completing the ten-week training and agreeing to additional training without having to finish the additional training, the lump sum bonus amount must be allocated to the initial ten-week training period.

Based on the facts provided, it is appropriate for the employer to allocate the lump sum bonus of $3,000 equally to each week of the ten-week training period – $3,000 lump sum bonus divided by 10 weeks equals $300 in bonus allocated per workweek to be included in calculating the regular rate of pay. The employer must then calculate the additional overtime pay due in those workweeks of the ten-week training period that the employee worked more than 40 hours. The additional compensation for each overtime week of the period may be computed and paid in an amount equal to one-half of the average hourly increase in pay resulting from bonus allocated to the week, multiplied by the number of overtime hours worked in that week.

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