Your Overtime Rate May Be Wrong: Bonuses and the Regular Rate
Overtime under the Fair Labor Standards Act is not one and one-half times a worker's base hourly rate. It is one and one-half times the regular rate of pay, and the regular rate is a broader figure. It includes almost all of what an employer pays an employee for a workweek, not just the number printed at the top of the pay stub. Employers that calculate overtime off the base hourly rate alone, while paying bonuses and differentials on the side, underpay overtime every week they do it. The error is easy to miss because the pay stub shows overtime being paid.
Several common forms of pay must be included in the regular rate. Nondiscretionary bonuses head the list. These are bonuses the employer announced or promised in advance so that employees would work more steadily, more rapidly, or more efficiently, including production bonuses, attendance bonuses, safety bonuses, quality bonuses, and bonuses promised for staying through a season or a project. Shift differentials for nights and weekends must be included. So must hazard pay, longevity pay, on-call pay, commissions, and the value of prizes and non-cash awards given as compensation.
A narrower set of payments may be left out. A bonus is discretionary, and excludable, only if both the decision to pay it and the amount remain in the employer's sole discretion until at or near the end of the period, and the bonus was not promised in advance. A holiday gift that does not depend on hours worked or performance may be excluded. So may reimbursement for actual expenses, pay for vacation, holidays, and sick days when no work is performed, and payments under qualifying profit-sharing or benefit plans. Calling a bonus discretionary in a handbook does not make it discretionary. If workers were told what they had to do to earn it, it belongs in the regular rate.
An example shows the size of the error. An employee earns $20 per hour, works 50 hours in a week, and receives a $300 production bonus for that week. Total straight-time compensation is $1,000 in hourly earnings plus the $300 bonus, or $1,300. Dividing $1,300 by the 50 hours worked gives a regular rate of $26 per hour. Because straight time has already been paid for all 50 hours, the employer owes an additional one-half of the regular rate for each of the 10 overtime hours, which is $130. An employer that ignored the bonus and paid the overtime premium off the $20 base rate would have paid $100. The shortfall is $30 for that single week, and it repeats every week a bonus is paid.
Bonuses that cover more than one week require an extra step. A bonus earned over a month, a quarter, or a season cannot simply be dropped into the week it is handed out. It must be allocated back across the weeks in the period it covers, and the overtime premium recalculated for each of those weeks in which overtime was worked. Employers frequently skip this step entirely, or pay the bonus as a lump sum with no overtime adjustment at all, which leaves unpaid premium spread across every overtime week in the bonus period.
These errors are widespread in manufacturing, warehousing, healthcare, oilfield services, security, and any workplace that uses incentive pay alongside hourly wages. They are also easy to check. A worker who received a bonus or a shift differential during a week with overtime can add all earnings for that week, divide by the hours actually worked, and compare the result to the rate the employer used to compute overtime. If the employer's overtime rate was built on the base hourly rate alone, the overtime was underpaid.
Workers in similar situations may have legal rights under the FLSA. Unpaid overtime and minimum wage claims are generally subject to a two-year statute of limitations, and three years if the employer's conduct was willful. Time limits apply.