Variable compensation programs are an important part of many organizations’ total rewards packages. Incentive plans, bonuses – call them what you will – variable compensation programs provide increased earnings opportunities for employees while providing return on investment for employers. Many questions often arise during the design phase in variable compensation program development. One element that employers often overlook, however, is the impact of variable compensation payouts on non-exempt employees. Organizations must be sure that their programs are in compliance with the Fair Labor Standards Act (FLSA) to avoid a potential audit by the Department of Labor.
According to the FLSA, non-exempt employees must receive overtime pay at the rate of 1.5 times their regular rate of pay after working more than 40 hours in a workweek. The often overlooked portion of this definition is the words regular rate of pay. An employee’s regular rate of pay includes not only their standard hourly wage, but also nondiscretionary bonuses, shift premiums, production bonuses, and commissions. Discretionary bonuses are not included in the regular rate of pay. Nondiscretionary bonuses are formula driven and communicated to employees prior to the start of the program year. Employees participating in a nondiscretionary bonus program have a right to receive a payout if they meet the expectations and goals set forth in the plan. How does one, then, calculate a non-exempt employee’s regular rate of pay?
Here’s an example: Let’s say an employer pays a non-exempt employee a $100 attendance bonus for working a full 40-hour workweek. If the worker works 50 hours during that week, and earns an hourly rate of $12, the employee’s gross paycheck will be $770. In this example, the calculations flow as follows:
• To determine the total pay for the week, add the incentive to the hours worked at the hourly base pay rate. Then divide that number by the total hours worked to determine the regular rate of pay (50 hours x $12/hour = $600 + $100 bonus = $700 divided by 50 hours = $14.00 / hour).
• Next, multiply the regular rate of pay by .5 to determine the hourly overtime premium, which is multiplied by the number of overtime hours worked ($14.00 x .5 = $7.00 x 10 hours overtime = $70).
• Add the $70 overtime to the base pay plus incentive calculation ($700), for the total pay of $770.
Your organization’s payroll system should be able to manage these calculations, if the guidelines have been established and communicated to the payroll department or outside vendor. While these calculations may in some cases be small, amounting to only a few dollars each year, compliance with the law is essential, and in the best interest of positive employee relations.