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New DOL guidance on non-discretionary bonuses and per-project pay

published in Mcafee & Taft EmployerLINC | January 20, 2020

On January 7, 2020, the Department of Labor’s Wage and Hour Division (DOL) released two opinion letters providing guidance for dealing with issues arising under the Fair Labor Standards Act (FLSA). While DOL opinion letters do not have the force of law, they are clear indications of how the Department would view a similar situation if it was considering an enforcement action. Further, courts routinely defer to, or adopt, the DOL’s opinions on FLSA questions.

Bonuses and calculating overtime

The first opinion letter concerned a question about overtime calculation and lump-sum, non-discretionary bonuses. As a reminder, non-discretionary bonuses – which generally include promised or announced attendance bonuses, production-related bonuses, and performance bonuses – must be included in the regular rate of pay when calculating overtime for non-exempt employees. This means that the bonus amount has to be accounted for with regard to weeks where such an employee works more than 40 hours.

In this instance, the employer asked the DOL how to properly allocate a bonus provided to employees who successfully completed a 10-week training course and then signed up for an additional eight weeks of training. The employees would receive a $3,000 bonus at the time they completed the 10-week course and signed up for the additional eight weeks, regardless of whether they actually completed the additional training. In the scenario described by the employer, an employee worked no more than 40 hours in eight weeks of the 10-week course, but worked more than 40 hours in two such weeks. The employee signed up for the additional eight weeks of training and received the $3,000 bonus.

The DOL, citing its own regulations, noted that non-discretionary bonuses should be allocated to the workweek(s) in which they are earned. If such a bonus is earned over just one week, the calculation is simple: the employer adds the bonus to the other compensation paid to the employee in that week and divides by the total hours worked to arrive at the employee’s regular rate. If, however, the bonus is earned over the course of multiple weeks, there are several avenues for allocation. First, if the bonus can be allocated in proportion to the amount earned in each week, it should be. If that it impossible, then the employer may allocate an equal amount of the bonus to each week of the period to which the bonus relates, unless facts exist that make it more appropriate to divide the bonus equally to each hour in a  pay period.

In this scenario, the DOL made several findings of note. Initially, it found that the bonus should be allocated over a 10-week period, rather than an 18-week period, because the bonus was earned by attending the 10-week course and signing up for the additional eight weeks, and was not contingent on the employee any of the supplementary courses. Additionally, the DOL found it was appropriate for the employer to divide the lump-sum bonus equally among the 10 workweeks, even though the employee had only worked more than 40 hours during two such weeks. Because each workweek counted equally toward earning the bonus, and missing any week would have been disqualifying, the DOL found that it was appropriate to apply $300 ($3,000 bonus divided by 10 weeks) to each week. The DOL cited a previous guidance that found dividing a bonus equally among workweeks was not unreasonable simply because an employee worked slightly more or less than 40 hours each week.

The end result of this exercise is the employee’s regular rate was increased for purposes of overtime during the two weeks he or she worked more than 40 hours. That additional earned compensation should be accounted for and paid to the employee at the time the lump sum payment is made.

Per-project pay and entitlement to overtime

The second opinion found an employer’s per-project payment method  for educational consultants met the salary basis test for the administrative exemption, meaning the consultants were not entitled to overtime. The employer offered  several examples, in which an employee was paid a pre-determined amount for assigned projects regardless of the number of hours worked. The first example had the employee working 40 weeks developing a literacy curriculum for $80,000 (paid at $2,000 per week). In the second example,   that same employee accepted a second project, eight weeks in duration that overlapped the first project, which paid the employee $6,000 (paid at $750 per week). Finally, the employer provided an additional variable: changes in the scope of work may cause renegotiation that would affect the employee’s prospective project rate.

The DOL found these examples satisfied the salary basis requirement, and the consultants would be considered exempt for purposes of overtime payments It noted the first example involved consistent biweekly payments that did not vary based on the amount of work performed and would not vary based on quality. The DOL had no trouble finding that the single project payment system fit within the salary definition. The second example, while requiring some additional explanation, similarly satisfied the test. Because the employee in the second example was already receiving the $80,000 salary, the additional $6,000 that was paid on the overlapping eight weeks — resulting in an additional $750 in compensation for each of those weeks — was deemed to be “extra” compensation.  DOL regulations permit employers to provide employees with “additional compensation without losing the exemption or violating the salary basis requirement.” Additional or extra compensation can be paid on any basis: flat sum, bonus, or hourly, and can be made for hours “worked beyond the normal work week.”

Finally, the DOL found that the potential fluctuations in the employee’s pay did not disqualify it as a salary. The key to this finding was that the changes would not be so frequent as to create a situation where the biweekly payment was rarely the same. The DOL cited several previous opinions finding that an employer can make changes to an employee’s prospective compensation, under the proper circumstances, and not lose the salary designation. These included: (i) allowing an employer to reduce its workweek, and proportionally its employees’ salaries, to four days a week for five weeks per year; (ii) allowing an employer to reduce its employees’ salaries because of a temporary work shortage; and (iii) allowing an employer to prospectively reduce salaries to accommodate business needs, unless it is done so frequently as to become the “functional equivalent of an hourly wage.” The DOL found that the potential contractual renegotiations would not be so frequent as to destroy the compensation’s status as a salary.

As always, employers should be mindful of these, and other, DOL opinions when crafting or reviewing their employee compensation practices.

FLSA 2020-1 (1/7/20)
FLSA 2020-2 (1/7/20)