The regular rate exclusions: percentage bonuses

We talked already about discretionary bonuses and gifts, and how any bonus that is not truly discretionary or truly a gift must be included in the regular rate. If wondering about if the bonuses you pay are really discretionary is giving you chest pain, a percentage-based bonus may be right for you.

In a percentage bonus structure, you pay the employee a percentage of both their straight time pay and their overtime earnings. For example, if I work for 48 hours at $100 per hour (I can dream, can’t I?), and my employer pays a bonus equal to 10% of my straight time pay and 10% of my time-and-a-half overtime earnings, the bonus payment need not be calculated into the regular rate even if the bonus is not discretionary. How can this be you ask? Simple, because the percentage is calculated both on straight time pay and overtime earnings, the bonus adequately accounts for overtime worked – as the Department of Labor puts it, “as an arithmetic fact.” 29 CFR § 778.503. Yeah, arithmetic. We love arithmetic in this blog, . . . no wait, we hate arithmetic, but we will make this one exception. So if I work a 50 hour week, 40 hours at $100 per hour and 10 hours and $150 per hour, I would make $4,000 in straight time pay and $1,500 in overtime for a total of $5,500. If my employer paid me a 10% bonus of $550, it need not recalculate the regular rate based on the bonus because the bonus includes both 10% of straight time pay, $400, and 10% of overtime earnings, $150.

The catch is that you can’t use a different percentage for straight time pay and overtime pay, and you can’t use a percentage bonus system to deliberately evade FLSA requirements. The regs give an example of a plan that a scoundrel (or to give the benefit of the doubt, someone who is confused as to overtime requirements), could use to evade overtime pay requirements. I could pay an employee $300 per week no matter how many hours were worked. I could characterize the rate paid for the first 40 hours as the “regular rate,” and the rate paid for any overtime hours at time and one-half of the regular rate. I could then give a “bonus” as a percentage of overall earnings. The trick is that the percentage changes every week depending on the number of hours worked, and I really only pay my worker $300 per week. 29 CFR § 778.502. They call it a pseudo-bonus or a sham – not the pretty kind you put on your pillows, either. (Don’t forget Emily wrote this, I don’t even know what a pillow sham is. Steve).

Since this is a short post, now is as good a time as any to cover a miscellaneous exclusion. Talent fees in the radio and television industries may be excluded from the regular rate. Hopefully, if you are in one of those industries, you know what those are. If you don’t, the regs define them at 29 CFR § 550.1. Again, if you have questions, you should contact your trusty labor lawyer, who has always been there for you.