Discretionary vs. Non-Discretionary Bonuses: It Matters for Calculating Overtime

Calculating Overtime Pay

If you received any sort of bonus payment from your employer, it is possible that your employer failed to pay you the correct amount of overtime. It is common for employers to incorrectly calculate an employee’s rate of pay for purposes of calculating overtime pay.

When calculating an employee’s overtime rate, all compensation (e.g. bonuses, commission payments, reimbursements, inventive payments, pier diems, and any other type of compensation) generally must be included when determining an employee’s rate of pay for purposes of calculating overtime pay. This is true even if the bonus is paid at the end of the year or at the end of some shorter amount of time designated by the employer for bonus pay.

If you think you have been “shorted” on your overtime pay, you can bring claims against your employer to recover your unpaid overtime premiums. Protect your rights and seek the advice and counsel of experienced employee rights attorneys like the ones at Herrmann Law.

When calculating overtime, the general rule is that all payments that an employer has agreed to pay are included in the hourly rate for purpose of calculating overtime. This includes bonuses that are non-discretionary like bonuses that might be paid for good performance or for meeting production or sales goals. A non-discretionary bonus is one that the employer has agreed to pay. Employees expect to be paid the bonus if the criteria are met.

By contrast, a discretionary bonus is excluded from the overtime calculations. A “discretionary” bonus is a bonus having two characteristics:

• It is solely up to the employer’s discretion WHETHER to pay the bonus AND
• It is solely up to the employer’s discretion as to what AMOUNT to pay as the bonus

Generally, employees do not expect to receive discretionary bonuses. When both characteristics listed above are met, the bonus is excluded from the calculation of an employee’s overtime rate.

The other general rule is that all non-discretionary bonuses must be applied to all of the hours worked during the “bonus period.” So, bonuses paid at the end of a calendar year will apply to overtime that might have been paid earlier in the year. For this reason, any year-end bonus should prompt a review of whether your employer shorted your overtime payments, even if that overtime was paid back in the spring or summer or fall.

Here is a simple example involving a three-month bonus period. Let’s assume our hypothetical employee worked 40 hours a week during each of those 12 weeks (480 hours) and worked an extra 20 hours of overtime during the period. In our example, the overtime was paid as the extra hours were worked based on the worker’s regular rate of pay.

Now, let’s assume that the non-discretionary bonus is paid at the end of the three months and let’s assume the amount was $1,000. Because the bonus was non-discretionary, the employer must go back and recalculate the overtime paid and must now include the bonus. In our example, the bonus raises the worker’s regular rate of pay by $2. That is, $1,000 divided by the number of hours worked (500) giving us an extra $2 per hour. Even though the overtime has already been paid, as noted, the employer must go back and recalculate the overtime and pay the additional amount. Since overtime must be paid at a 50% premium, our hypothetical worker is due an extra $1 for every hour of overtime worked ($2 x 50%). The employee worked an extra 20 hours. Thus, the employee must be paid an extra $20 of overtime pay along with the $1,000 bonus.

Call the Employee Rights Attorneys at Herrmann Law Today

For more information, call the Employee Rights attorneys at Herrmann Law. If you think that your employer has miscalculated your overtime or has otherwise engaged in wage theft, call us. We are proven, experienced, employee-focused attorneys representing workers across the United States in all types of workplace disputes. Use our Online Contact page or call us at (817) 479-9229.