The Fair Labor Standards Act of 1938 (“FLSA”) is a federal statute that was introduced to regulate certain employment practices. For example, the FLSA establishes a national minimum wage, guarantees pay at a rate of one and one-half times the employee’s regular rate of pay for certain jobs, and prohibits most employment of minors in oppressive child labor positions.
The FLSA also imposes various requirements on employers. It is important for employers to be aware of the requirements imposed on them by the FLSA. For example, many employers will pay their employees bonuses to reward them for their time and commitment during the year. The problem for employers is that a year-end non-discretionary bonus may be included in employees’ regular rate of pay when calculating overtime.
Generally, the FLSA requires that employers calculate employees’ regular rate of pay by including all compensation paid to employees during the workweek. Employers must then calculate overtime based on employees’ regular rate of pay. Sometimes bonuses are required to be included when calculating employees’ regular rate of pay, however, is an exception and not used for calculating overtime. If bonuses are included in employees’ regular rate of pay then employers must pay more overtime, and then more payroll tax as well.
There are exceptions that permit the payment of discretionary bonus which is not required to be included in employees’ regular rate of pay, however, is an exception and not used for calculating overtime. For a bonus to be excluded from the calculation of employees’ regular rate of pay it must be discretionary. For a bonus to be discretionary the payment must be solely within employers’ discretion. This means that the payment cannot be mandated by a contract, agreement, or based on an implied promise. Employers must have complete discretion to decide whether to pay the bonus, and how much to pay if they chose to do so.