Overtime pay, or the alleged lack thereof, is an issue we regularly see pop up in the California courts. While California employers generally recognize that non-exempt employees (e.g. many hourly employees) who work overtime must receive overtime premiums on their base pay, not all are aware that these premiums may also be required on other, “supplemental” aspects of compensation to nonexempt employees. A common example? Bonuses.
Legally speaking, employers are mandated to pay overtime premiums on non-discretionary bonuses to non-exempt employees when those employees have worked overtime during the time frame for which the bonus is paid (i.e., whether it is paid on a monthly, quarterly, yearly basis). If that sounds confusing, it is because it can be. Indeed, calculating overtime for weeks when a worker earns a “nondiscretionary” production bonus is often a trap for unwary employers.
Under both California and federal law, employers must calculate overtime pay based on an employee’s regular rate of pay. “Regular rate”, however, is not necessarily the same as an employee’s “straight hourly rate.” The calculation for “regular rate” in each workweek is:
- i) all compensation earned (including all hourly pay and “nondiscretionary” production bonuses),
- ii) divided by the number of hours worked in that week.
Claims of violations pertaining to non-discretionary bonuses are the type of violation that plaintiffs’ attorneys often look to bring on a class basis.
To be clear, employers are not obligated to pay an overtime premium on all bonuses. Certain types of bonuses (and other “supplemental” forms of compensation) are exempt. Not surprisingly, however, this exclusion is limited and employers should act on it with caution. Guidance provided by federal regulations is that “the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement . . . If the employer promises in advance to pay a bonus, he has abandoned his discretion with regard to it.” Conversely, “[a]ttendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee’s continuing in employment until the time payment is to be made and the like” fall in the “non-discretionary” category.
In conclusion, employers who pay bonuses and other forms of “supplemental” compensation to non-exempt employees should recognize the potential need to pay overtime premiums on these payments. To discuss whether your bonus structure is at risk for wage and hour violation claims, contact business attorney Drew E. Pomerance today.