Make Sure You Do It Right – Part 2 of 2
by Alan B. Graves
California Department of Labor Standards and Enforcement explains the method of calculating overtime with an inclusion of a bonus is as follows: “The method of calculating the overtime rate of bonus pay is to divide the amount of the bonus by the number of hours worked (including the overtime hours), to determine the regular hourly rate of bonus pay times the number of overtime hours worked. This amount will be the overtime amount due on the bonus portion of the earned wages, and should be paid in addition to any hourly overtime. So for example if an employee works five 10 hour days in one week at an hourly rate of $10 per hour she would earn $10 per hour for each 8 hours worked on the day and $15 per hour for the 2 overtime hours each day. At the end of the week she has worked 50 hours (40 hours at regular pay and 10 hours of overtime) She earned $550. Then, because she met criteria to “earn” a bonus, she was paid a $100 bonus for the work she did that week.
This sounds great, but the employer must now figure out what the employee earned in overtime on her bonus. That’s when you follow the calculation described above. $100 divided by 50 hours shows an hourly bonus rate of $2. Multiply this by 1.5 and the overtime bonus pay rate is $3. She worked 10 hours of overtime making her bonus overtime pay $30. So the employer will need to make sure the employee is properly paid for this overtime. So in total, the employee is given a bonus of $2 per hour for 40 hours ($80) and $3 per hour for 10 hours ($30). So the actual total of the bonus paid would be $110. This is a very simplistic example and depending on specific bonus plans or structure it may change these calculations. The bottom line is when paying a bonus an employer needs to double check to find out how it might impact overtime calculations if applicable.
Discretionary Bonuses – Discretionary bonuses as noted above are not “earned” Why is this important? Because these bonuses are not included in determining an employees regular rate of pay and therefore do not impact overtime calculations. Specifically California labor law defines a discretionary bonus as: “sums paid as gifts at a holiday or other special occasions, such as a reward for good service, which are not measured by or dependent upon hours worked, production or efficiency, are not included for purposes of determining the regular rate of pay.”
Whether or not a bonus is “discretionary” is not easy to determine and should be reviewed by an experienced labor law attorney to make sure an employer does not run afoul. There are some general principles to help determine if a bonus is purely discretionary. Generally discretionary bonuses cannot be measured by or dependent on hours worked, production or efficiency. The bonus cannot be so substantial that employees consider it part of the wages they work for. Holiday gifts are typically considered discretionary and also excluded from regular rate of pay. Suggestion Awards may qualify as a discretionary bonus, but the bonus must be an amount which has no relation to earnings, the award is a bona fide award for a suggestion, employees not required to participate, no time limit for suggestions, and no prior notice that an employee was working on a suggestion when it announced the program.
Conclusion – California labor laws regarding wage and hour issues for non-exempt employees can muck up an employer’s good intentions to provide employees with bonuses. That being said employee bonuses are an important part of our work culture that help boost productivity, keep morale high, and maintain competiveness. When considering a bonus payment plan, offering employee commissions, handing out end of year bonuses, or giving a discretionary bonus, please be sure to pay careful attention to the wage and hour laws governing bonuses. When in doubt contact an experienced employment law attorney to help navigate you through this area of the law.
Alan B. Graves is an associate Neil Dymott. His areas of practice include business litigation and labor and employment law. For further information, Mr. Graves can be reached at (951) 303-3930 or agraves@neildymott.com.