Recalculation of regular rate when paying nondiscretionary bonus based on fixed percentages

by Angel Berberena, Esq. (Goldman Antonetti & Córdova, LLC)

The United States Department of Labor (US-DOL) issued Opinion Letter FLSA 2019-7 (July 1, 2019) addressing if an employer is required to retrospectively recalculate the regular rate of pay if it pays a nondiscretionary bonus that is a fixed percentage of straight-time wages received by the employee.

In this case the employer, under the terms of a collective bargaining agreement, paid a quarterly bonus and an annual qualification bonus based on fixed percentages of the straight-time rate. The bonus consisted of: 1) 15 percent of the straight-time hourly rate; 2) 22.5 percent (1.5 x 15) of the contractual straight-time rate for hour earned at 1.5 rate; and 3) 18.75 percent (1.25 x 15 percent) of the contractual straight-time hourly rate earned at double-time rate.

An employer may base a nondiscretionary bonus on work performed during multiple workweeks and pay the bonus at the end of the bonus period. See 29 C.F.R. § 778.209. In that case, the employer may “disregard the bonus in computing the regular hourly rate until such time as the amount of the bonus can be ascertained.” 29 C.F.R. § 778.209(a). Once the amount is ascertainable, generally the employer must retrospectively recalculate the regular rate for each workweek in the bonus period and pay the additional overtime compensation due on the bonus. See id. “If it is impossible to allocate the bonus among the workweeks of the period in proportion to the amount of the bonus actually earned each week,” the employer must adopt “some other reasonable and equitable method of allocation.” 29 C.F.R. § 778.209(b). One such method is averaging the bonus earnings across workweeks. See id.

An employer, however, is not required to retrospectively recalculate the regular rate if the employer pays a fixed percentage bonus that simultaneously pays overtime compensation due on the bonus. See 29 C.F.R. § 778.210; Brock v. Two R Drilling Co., 789 F.2d 1177, 1179-81 (5th Cir. 1986). For example, a bonus that is 10 percent of straight-time wages (the contractual hourly rate × straight-time hours worked up to 40) and 10 percent of overtime wages (1.5 × the contractual hourly rate × straight-time hours worked over 40) does not require recalculation of the regular rate because the bonus includes the overtime compensation due on the bonus as an arithmetic fact, fully satisfying the FLSA’s overtime requirements. See 29 C.F.R. §§ 778.210, 778.503.Similarly, a bonus that is 10 percent of total compensation-including hourly wages, overtime, bonuses, commissions, etc.-does not require recalculation. See, e.g., 29 C.F.R. § 778.210; WHD Opinion Letter FLSA2006-4NA, 2006 WL 4512946, at *1 (Feb. 17, 2006).

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