Bonuses, Incentives & Catch-Up Payments:
Do FLSA amendments for bonuses give employers wiggle room or create more opportunity for employers to make errors?
The agency, in its final rule, said employers can use non-discretionary bonuses and incentive payments to satisfy up to 10% of the new salary requirements in order for an employee to be exempt from overtime pay. The new salary requirement is $47,476 annually or $913 per week.
With this wiggle room, comes more rules. These rules guide how employers can use these bonus/incentive payments to reach the new exempt salary threshold. Of course, whenever there are rigid rules around a wage and hour requirements, employers should proceed with caution when implementing the rule into their payment structure.
These rules, if not followed precisely and with great care, can provide an opportunity for error and open a business to potential wage and hour violations and/or misclassification liabilities. These liabilities can include back overtime pay, waiting time penalties and other wage and hour liabilities, such as missed breaks and meal periods (depending on the state the employer is doing business in.
So, what are these Five (5) rigid rules?
1) The payments must be truly “nondiscretionary.” What does this mean? The FLSA rule defines “non discretionary” bonuses as “Promised bonuses such as those announced to employees to induce them to work more efficiently or to remain with the firm are considered non-discretionary. Examples include individual or group production bonuses, and bonuses for quality and accuracy of work. Incentive payments, including commissions, are also considered ”non-discretionary”.
2) No Annual bonuses. Non-discretionary bonus/incentive/commission payments have to be made at least quarterly to count toward the salary threshold for exempt employees. If, by the last pay period of the quarter, the sum of the employee's weekly salary plus non-discretionary bonus/incentive/commission payments does not equal 13 times the required weekly salary amount to remain exempt ($913 x 13), the employer can make one final catch-up payment no later than the next pay period after the end of that quarter.
3) Quarterly catch-up payments count. Any catch-up payment made will only count toward the previous quarter's salary amount not toward the period in which the payment was made.
4) OT pay due if catch-up payment is needed and not paid. If the employer chooses not to make the catch-up payment, and the employee’s pay for the quarter doesn’t equal the required salary limit ($913 x 13), the employee would be entitled to overtime pay for any overtime hours worked during the quarter.
Rule 4 causes additional consideration to be made:
- If a catch-up payment decision will be made at the end of the quarter, tracking of these employee’s hours during that quarter is necessary. Consider making an internal policy requiring all exempt employees to track their hours. However, be sure to not make deductions to the employee's pay if they work less than the 40 hours a week as this could cause the position to lose the exemption status.
- If there were any other non-discretionary bonuses made during that quarter, and the decision to not make the catch-up payment is made; that non-discretionary bonus that was made must be included in the overtime calculation rate of pay.
- If the catch-up payment is not made, this position's classification of exempt has been changed to non-exempt therefore obligating meal and rest periods according to state and federal law.
- All other wage and hour requirements for nonexempt employees will be mandated, as this changes the employee's exemption status. Applying non-exempt wage and hour rules retroactively could be difficult, if not impossible. Be sure to check both state and federal non-exempt employees wage and hour laws prior to making this decision.
5) 90% of an exempt employee’s salary must be fixed. In other words, 90% of an employee’s salary cannot be dependent upon the quality or quantity of work performed. In addition, the employee’s duties must primarily involve executive, administrative or professional duties (DOL duties tests).
The interplay of state and federal laws must be considered as well, as some states salary requirements may increase past this federal law, such as California. As you can see, these decisions should be made cautiously and further advice by a subject matter expert is always recommended.