DOL Clarifies Bonuses and Regular Rate of Pay

Thursday, February 05, 2009

A common payroll challenge is determining when to pay overtime on certain types of pay. Hazard pay, shift differential pay, spot bonuses, attendance and length of service bonuses are but a few of the payment avenues where the question arises: should this be included in the employee’s regular rate of pay for determining overtime compensation?

The Department of Labor (DOL) recently provided clarification to one employer. The situation presented in DOL Opinion Letter FLSA2008-12 was one where a city employer decided to pay a $1,000 bonus to full-time emergency communications operators, in recognition of the high stress level associated with their jobs. There was no prior promise or agreement to pay the bonus. The sticking point was that the city executed a Memorandum of Understanding (MOU) document with the employees’ union shortly before paying out the bonus.

This raised the question as to whether the bonus was discretionary. For calculating overtime, the general rule is that the regular rate of pay includes all types of pay. The Fair Labor Standards Act (FLSA) regulations carve out an exception for discretionary bonuses. The amount, if any, and the timing of the bonus must remain at the employer’s discretion. If the bonus is paid out pursuant to a prior promise or agreement, it is no longer discretionary.

The DOL reviewed the facts and concluded that the employer’s bonus was discretionary. The MOU was not a prior promise or agreement and created no advance expectation of payment. Instead, the MOU simply formalized a decision that was already made. Therefore, the DOL ruled that in this case, the “stress” bonus was discretionary and not subject to the overtime rules for calculating the regular rate of pay.

Not all bonuses are created equal. Bonuses that are paid out according to an agreement, policy or published company benefit will typically need to be included in the regular rate of pay. Prudent employers should review all of their existing bonus programs to determine whether they are discretionary and make the appropriate calculations for the regular rate of pay.