Michigan Employment Law

Hey, guess what?  Emily is back.  

Last time we discussed the requirements for excluding gifts and Christmas bonuses from the regular rate under the FLSA. Now we are going to discuss discretionary bonuses, which are quite similar.

Under the Regs, you can exclude from the calculation of the regular rate:

(3) Sums paid in recognition of services performed during a given period if . . . (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

29 CFR § 778.200 (a)(3). Like gifts and holiday bonuses, for the employer to exclude a discretionary bonus, the employer cannot be obligated to pay it. As soon as the employer promises to pay the bonus, whether in a collective bargaining agreement, or in a handbook or policy manual, the bonus is no longer discretionary and must be included in the regular rate. See O’Brien v. Town of Agawam, 350 F.3d 279, 295-96 (1st Cir. 2003). Also, if the bonus is tied to objective criteria like production numbers, efficiency rates, or even attendance, it is not a truly discretionary bonus and cannot be excluded from the regular rate. One caveat – according to the Department of Labor, it is okay to document the decision to pay the bonus in writing before the bonus is paid, as long as the employer did not previously promise the bonus. U.S. Dep’t of Labor FLSA Op. Letter 2008-12, (December 1, 2008).

What you can’t do is say in your employee handbook that you retain discretion to pay an annual or other periodic bonus when you pay it every year – it’s not discretionary just because you say so. The same is true for performance-based bonuses. For example, back when I was a seller of toys, we had a bonus program with a clear performance-based structure. If we hit daily sales targets, we were paid a bonus for each hour worked on that day. If my employer put something in the employee handbook about that bonus being discretionary, the bonus would still need to be included in the regular rate because it is tied to objective performance criteria, the sales targets. Hmmm . . . I think they might owe me a dollar or two.

You may be thinking, “What about a signing bonus?” Signing bonuses come in two flavors: up-front payments before work begins and deferred payments paid after a particular length of service. The up-front payments do not need to be included in the regular rate, but the deferred payments do. Those deferred payments are meant to encourage employees to remain at their job, and the Regs specify that they cannot be excluded. 29 CFR § 778.211(c). Since an up-front signing bonus isn’t related to the employee’s length of service, it can be excluded from the regular rate. Minizza v. Stone Container Corp. Corrugated Container Div. East Plant, 842 F.2d 1456, 1462 (3d Cir. 1988).

Next time, we’ll take on the thrilling topic of percentage bonuses.

You have a bunch of employees that work in your warehouse. You also have a bunch of really cool stuff that you ship from your warehouse. Apparently, you don’t trust your employees, because at the end of each shift you require your employees to wait around while you conduct security screens of each employee to make sure that they are not walking out of the warehouse with your really cool stuff. Do you have to pay your employees for the time they spend (up to 25 minutes each day by the way) waiting to go through your security screen? According to the Supreme Court the answer is a big old NO!

Yesterday, SCOTUS issued its opinion, a unanimous opinion by the way, in Integrity Staffing Solutions, Inc., v. Jesse Busk et al., 574 U.S. __ (2014). You can see it here.

“Integrity Staffing Solutions, Inc. provides warehouse staffing to Amazon.com throughout the United States. Respondents Jesse Busk and Laurie Castro worked as hourly employees of Integrity Staffing at warehouses in Las Vegas and Fenley, Nevada, respectively. As warehouse employees, they retrieved products from the shelves and packaged those products for delivery to Amazon customers.”

Id.

According to the opinion, at the end of each shift Integrity requires its employees to pass through a metal detector. From the sounds of it, it was like boarding a plane without the pat down or full body scan. You know, you take your keys and wallet and stuff out of your pockets and walk through a metal detector. We do that all the time now, don’t we, at airports, going into stadiums, even at some schools. No big deal, right? Seems like it was a big deal for the employees. They filed suit claiming that the failure by Integrity to pay for the time it took for these screens, up to 25 minutes per day according to the plaintiff’s, should have been paid under the FLSA. They argued that the screenings were to prevent theft and thus “solely for the benefit of the employers . . . .” Id.

SCOTUS disagreed. First, the Court pointed to the Portal-to-Portal Act and reminded us that “activities which are preliminary to or postliminary to said principal activity or activities” are excluded from the FLSA’s coverage. We talked about this a while ago. Remember Donning and Doffing? Check it out here. Then the court reminded us that principal activity includes activities that are an integral and indispensable part of the principal activity. The question, according to the Court, “Was the waiting time for the screen an ‘integral and indispensable part of the principal activities’ of the employees?” If it is, it is paid time. If it is not, it is unpaid time.

The Court then said that an activity is “integral and indispensable to the principal activities that an employee is employed to perform if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.” Like, the Court said, “showering and changing clothes” after working with toxic chemicals, or “sharpening knives” in a meat packing plant but not “donning protective gear” in a poultry plant.

Ultimately, the Court held that the security screenings at issue were not compensable. In short, the company does not have to pay the employee’s while they wait for their turn to go through the metal detector.

SCOTUS said, quite logically, screenings were not “principal activities” pointing out that the company did not employ the employees to be screened. They employed them to ship products. Then the Court noted that the screenings were not “integral and indispensable” to shipping products. The Court stated that the employees could have very easily continued to ship products even if the screenings stopped. They also could have walked off with a bunch of really cool stuff form the warehouse. The Court didn’t say that I did and Integrity must be worried about it of why do the screens?

Then the Court noted that the 9^th Circuit erred when it focused on the fact that the employer required the screenings stating: “If the test could be satisfied merely by the fact that an employer required an activity, it would sweep into “principal activities,” the very activities that the Portal-to-Portal Act was designed to address.” Id. Makes sense again right? I mean like I said before, who would drive to work if their employer didn’t make them do it? Especially today when so many jobs can be done remotely. And finally, the Court rejected the employee’s argument that they should get paid for waiting simply because the employer could, if they wanted, shorten the waiting time. Basically, the court said deal with it at the bargaining table it is not covered by the FLSA.

Again, you can see the whole opinion here if you are interested.  Oh and by the way, I wrote this one, we will get back to Emily next time.

OK, I have to tell you something before we get started. I did not write this post. In fact, I did not write any of the next 8 posts. Emily Rucker did. Emily is one of our new associates and she is really smart. Turns out she is pretty funny too. I hope you enjoy and learn something.

Steve.  Oh, and here is a picture of Emily so you can put a face with a name when you hire her to be your lawyer.

I know you’re sick of talking about the regular rate. I’m sorry. I really am. But we haven’t covered everything yet. In the last few weeks, we did some painful calculations to figure out the “regular rate” for overtime purposes. And by painful, you know I mean painful for Steve because he hates math. Now we are going to talk about what you can exclude when calculating the regular rate. The good news is that since we are excluding instead of including, the math will be kept to a minimum. We’ll take the exclusions one at a time.

One important note before getting into the meat of the rules: most of the payments excluded from the regular rate cannot be credited towards overtime compensation, but a few of them can. I’ll note those cases as they come up.

First, we’ll take on “bonuses”. As we discussed earlier, some kinds of bonuses must be included in the calculation of the regular rate, like those for employees who get an hourly rate plus a production bonus. Some types of bonuses do not have to be included. One of the kinds that can be excluded are bonuses that are really gifts.

Gifts? Yea, gifts, you know, like Christmas gifts  (other holidays are relegated to “special occasions” under the regs). Although the traditional Christmas bonus seems to be going the way of the passenger pigeon for many employers, it was still an important part of compensation at the time the FLSA was passed. According to sociologist Vivian A. Zelizer, Christmas bonuses started when employers began replacing gifts like turkeys and gold coins with cash around the turn of the 20^th century. They became a common way to keep workers happy, especially before overtime rates came into the picture with the FLSA. Apparently people like cash better than turkeys – who knew?

The FLSA excludes the following from the regular rate:

(1)                   Sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency

29 CFR § 778.200 (C)(1).

Thanks, you shouldn’t have. If the gift is really a bonus based on the quantity or quality of the employee’s work, you must still include the amount in the regular rate computations. The regs give some further guidance on this concept:

(b) Gift or similar payment. . . . the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment . . . is no longer to be considered as in the nature of a gift. If the payment is so substantial that it can be assumed that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift. Obviously, if the bonus is paid pursuant to contract (so that the employee has a legal right to the payment and could bring suit to enforce it), it is not in the nature of a gift.

Once, I worked at a toy store, and we went to a retail show to sell toys. We didn’t make much money, so when the weekend was over my “bonus” was a stuffed goat. I still have it. His name is Herman. Since my employer never promised a bonus, and I did not receive the goat based on my performance, the value of that stuffed goat did not need to be factored into the regular rate. The regs give you a little more flexibility when it comes to yearly gifts like Christmas bonuses:

(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate . . . even though it is paid with regularity so that the employees are led to expect it and even though the amounts . . . vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency.

29 CFR §778.212(a)-(b). To continue with the goat example . . . if on my birthday I received one stuffed goat or another stuffed cloven-hooved creature for every year I worked at the store, the value of the stuffed goat need not be included in the regular rate. But if I received one goat for every ten goats sold, then the value of the goats must be included.

See, that wasn’t so bad? No math at all. Next week, we’ll take on discretionary bonuses and signing bonuses.