Employers Must Accurately Calculate Regular Rate of Pay that Includes Bonus & Commissions
One of the most commonly violated portion the Fair Labor Standards Act pertains to overtime pay and calculating the employee’s “regular rate of pay.” Overtime should be paid at time-and-a-half (1 ½ times) the employee’s regular rate of pay, which cannot be below minimum wage.
However, too many employers interpret that to mean that overtime should be paid at time-and-a-half of the employee’s hourly rate. While that is often the case, it is not always the case and an employee’s hourly pay may not be their “regular rate of pay.”
This article explores the variables in calculating regular rate of pay and the steps employers should take to ensure that employees are paid overtime in compliance with regular rate of pay. For more information see our other articles in our FLSA Violations: Regular Rate of Pay Series
Regular Rate of Pay Miscalculation Errors are Common with Bonus Pay
There are four common scenarios in which employers miscalculate regular rate of pay.
Those situations are when employees are paid a bonus or commission, shift differential,when the employees are day rate employees or tipped employees. In theses situations, the employee’s total pay for hours worked is adjusted and thus regular rate of pay must be adjusted.
- Bonus or commissions
- Shift differential
- Day rate employees
- Tipped Employees
Regular Rate of Pay Must Include Bonus or Commission Pay
Some employers believe that bonus or commission pay does not affect regular rate of pay because it is based off of performance, not off of the number of hours worked. (Although some bonus pay is for working specific shifts such as undesirable shifts or for shifts that were changed with little notice under a scheduling law).
Even when, no especially when, pay is based off of performance, that pay must be included in calculating regular rate of pay. That includes anytime pay is used to incentivize job performance, quality, or accuracy.
Outcome-based bonuses include commissions, bonuses and non-cash gifts. Non-cash gifts, such as movie tickets for employee performance must be included as the value of the gift in the employee’s regular rate of pay.
Discretionary Bonus Exceptions Allowed by FLSA
There are a few bonus exceptions that do not have to be included in the calculations for regular rate of pay. These exceptions must be discretionary and cannot be based on work performance.
For example, a holiday bonus or a gift bonus can be excluded from regular rate of pay as long it is completely up to the employer’s discretion and is not part of a performance plan and isn’t based on an agreement with the employee. The bonus must be paid pursuant to a bona fide profit sharing plan and the employees don’t have reason to expect payment.
Bonuses that are paid based on a percentage of the employee’s total income are also not included in regular rate of pay. A bonus that is a percentage of total earnings must pay off of the employee’s total overtime pay to be excluded from regular rate of pay.
Although not considered a bonus, the employee expense reimbursements
Calculating Regular Rate of Pay
To determine the employee’s regular rate of pay the employer must follow these steps. 1. Determine what should be included in the employee’s regular rate of pay. 2. Define the time frame for pay period. 3. Calculate straight-time earnings 4. Calculate the new regular rate of pay 5. Calculate new overtime pay 6. Calculate total earnings
Determine if Bonus Pay Should be Included in Regular Rate of Pay
First, determine if a bonus must be included in the employee’s total pay. Unless the pay is completely discretionary or paid as a percentage of the employee’s total pay, any bonuses and all commissions must be included in the employee’s regular rate of pay. Remember that non-cash gifts must be included in regular rate of pay.
Define the Time frame
Overtime must be paid in the pay period that it is earned in.
However, not all bonuses are paid in the same time frame.
Therefore, if a bonus or commission is paid over a period of more than a week, then the overtime must be paid without regard to the bonus. Once the bonus (or commission) amount is known, then overtime pay must be apportioned back over the period that the bonus was earned and overtime pay adjusted.
If the bonus or commission was paid over a monthly time frame, then the time frame applied is a month. If the bonus is a quarterly bonus, then the time frame is a quarter.
Calculate Straight-Time Compensation
Straight time is calculated by multiplying the employee’s total hours worked by their regular rate (hourly rate) and adding the bonus.
Example: Rosa worked 45 hours and makes $11 an hour. In addition, she earned a bonus of $30 for the week. $525 is Rosa’s straight time compensation.
$525 =$11 X 45 + $30
Calculate the New Rate of Pay for Overtime Worked
For any overtime worked, Rosa must be paid time-and-a-half of her regular rate of pay (not hourly rate). Since Rosa earned $525 and worked 45 hours, her regular rate of pay is $11.67.
$525 / 45 hours = $11.67 per hour. This is different from her $11 hourly pay.
Calculate the new Overtime Pay
Rosa worked 5 hours of overtime. Since her regular rate of pay for the week was $11.67, Rosa must be paid $17.51 per hour of overtime.
$17.51= $11.67 per hour X 1.5
Calculate Total Earnings
Rosa worked 40 hours at a rate of $11 an hour. She also earned a $30 bonus. In addition, she worked 5 hours of overtime for the week. Her total earnings are calculated by adding all her earnings together.
$40 X $11 an hour = $440
Plus, A $25 bonus = $425
Plus 5 hours of overtime at $17.51 an hour= $87.55
If Rosa had been paid overtime based on her hourly pay, she would have been paid $16.50 an hour. She should have been shorted $1.01 per hour and $5.05 for the week. Her employer would have violated the FLSA rules regarding overtime pay.
For more information, please see article 4 of our series on FLSA Violations: Regular Rate of Pay which covers what to do when Things Get Complicated When Bonus or Commissions Follow a Different Cycle than a Week article 4
Let SwipeClock Help
Across the United States, many employers pay employees bonus income, shift differential, commission, signing bonuses and other forms of additional income. Calculating an accurate regular base of pay is impossible without accurate timecards, wage income, and bonus income recorded and retained.
Additionally, these businesses have to also comply with Federal Overtime Laws, the Family Medical Leave Act and any other national or local laws that are enacted. SwipeClock provides a comprehensive array of workforce management and time tracking tools that can help businesses to more easily stay in compliance with local and national laws.
Records are effortlessly kept for years and accrual is automatically tracked and reported to employees according the state and city laws.
Written by Annemaria Duran. Last updated November 2, 2017