As many employers recognize, a seemingly small oversight in administering employee payroll can have significant consequences, including unexpected complex litigation. One such oversight is failing to consider the wage-hour requirements for bonuses paid to non-exempt employees.
Many employers have bonus programs under which employees receive or expect to receive some type of bonus at the end of the year. Federal wage-hour law may require employers with such a bonus program to calculate retroactively employees' overtime rate and then pay a "true-up" amount for any overtime the employees worked during the past year. Failing to make such bonus true-up payments may lead to complex litigation.
Calculating the Regular Rate of Pay
The federal Fair Labor Standards Act (FLSA) requires that non-exempt employees be paid one and one-half times their "regular rate" of pay for all hours worked in excess of 40 in a single workweek. Subject to certain narrow exceptions, the "regular rate" an employee is paid "shall be deemed to include all remuneration for employment paid to ... the employee."1 One such exception is for a "discretionary" bonus, where "both the fact the payment is to be made and the amount of the payment are determined at the sole discretion of the employer …" and "not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly."2
Identifying the Discretionary Bonus
The Department of Labor (DOL) takes a narrow view of what constitutes a discretionary bonus under the FLSA. According to the DOL, "if an employer announces to his employees in January that he intends to pay them a bonus in June, he has thereby abandoned his discretion regarding the fact of payment …"3 A bonus "announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm" is not discretionary.4 The DOL has repeatedly found that bonuses related to an employer's financial results are not discretionary.5
Time to True Up
Employers with non-discretionary bonus programs should "true up" the overtime payments made to non-exempt employees. This means the employer must recalculate the employee's regular rate for the period covered by the bonus and then make "true-up" payments for any overtime worked during this period based on the recalculated regular rate. This is often easier said than done. Employers should consult the DOL's regulations6 to determine how to correctly calculate the mandatory true-up payments.
Cost of Failing to True Up
Employers with non-discretionary bonus programs that fail to make required true-up payments to non-exempt employees risk becoming the target of a DOL enforcement action or a private lawsuit.
The DOL recently has brought enforcement actions against employers that exclude bonuses from employees' regular rate of pay.7 Employees have increasingly pursued class-based claims against their employers based on alleged failure to include bonus payments in calculating employees' regular rate of pay for overtime purposes. Such allegations have proven a fruitful basis for wage-hour plaintiffs' lawyers to certify a class or collective action. See, e.g., Lay et. al. v. Gold's Gym International Inc., No. 5:12-cv-00930, 2013 WL 5595956 (W.D. Tex. Oct. 4, 2013) (conditionally certifying collective action based on gym's nationwide policy to exclude bonuses from its calculation of employees' regular rate of pay); Daniels v. Aeropostale West Inc. et al., No. 3:12-cv-05755, 2013 WL 1758891 (N.D. Cal. Apr. 24, 2013) (conditionally certifying collective action based on allegation that national retailer had a uniform, nationwide practice of failing to include bonus payments in non-exempt employees' regular rate of pay). We expect to see increased collective/class actions involving these types of allegations.8
Employers should consult with legal counsel to determine whether their bonus programs require them to make true-up payments to their non-exempt employees. Ignoring this issue can lead to costly consequences for unwary employers, including unwanted complex litigation.
1 29 U.S.C. § 207(e) (emphasis added).
2 29 U.S.C. § 207(e)(3)(a) (emphasis added).
3 29 C.F.R. § 778.211(b).
4 29 C.F.R. § 778.211(c).
5 DOL Wage and Hour Opinion Letter dated May 11, 2006.
6 29 C.F.R. § 778.209(a).
7 See, e.g., Solis v. Kinder Morgan Energy Partners LP, No. 4:11-cv-00454 (S.D. Tex. July 28, 2011 Consent Decree requiring company to pay $800,000 in unpaid true-up payments).
8 It is worth noting that lawsuits involving such claims are not typically settled on the cheap. See, e.g., Fabio Gonzalez v. Universal Alloy Corp. et al., No. 8:13-cv-00807 (C.D. Cal. May 2014) ($4.8 million settlement); Sherrill et al. v. Sutherland Global Services Inc. et al., No. 6:05-cv-06537 (W.D.N.Y. 2011) ($4 million settlement).