It’s time for another edition of “Ask your HR Professional!” This time we are going to look at bonuses.

‘Tis the season! As 2022 is wrapping up, many organizations find themselves in a place where they will be giving bonuses to employees. At the end of 2021, XperHR conducted a Salary Budget Survey for 2022 where 69% of the 429 employers responding to the survey said they planned to provide bonuses for at least some employees in 2022.

Individual performance-based bonuses are the most popular type for those surveyed and company performance-based bonuses are a close second. If you haven’t yet worked out if you will provide a bonus in 2022, time is running out! In fact, if you have not yet considered a budget for 2023’s bonuses, you are behind the 8 ball! 

So, let’s say you are in the process of determining your bonus structure. It is really important to determine if it will be a discretionary or a nondiscretionary bonus. If the bonus is awarded at the sole discretion of the employer, it is discretionary. Discretionary bonuses are determined by the employer without any prior promise or agreement. Employees have no contract right, express or implied, to a discretionary bonus. If an employer promises in advance to pay a bonus, it is no longer discretionary. 

But why does it matter if it is discretionary or non-discretionary? Under the Fair Labor Standards Act (FLSA), nonexempt employees are typically owed overtime when they work more than 40 hours in a workweek. In determining how much overtime is owed, some forms of payment (gifts, holiday/vacation/sick pay, expense reimbursements, and discretionary bonuses) can be excluded from the calculation of non-overtime compensation. Everything else must be added together (including hourly wages, salaries, commissions, tips, day rates, piece rates, nondiscretionary bonuses, on-call pay, etc.) to determine all remuneration for employment paid to the employee during the workweek. All that to say, non-discretionary bonuses must be included as non-overtime compensation, while discretionary bonuses can be excluded. 

If one of these forms of payments (since we are talking about bonuses here, let’s stick to a non-discretionary bonus) covers more than one workweek (such as an annual bonus), that payment must be distributed among all workweeks it was intended to cover and then factored into the overtime calculations. If the payment cannot be anticipated ahead of time, the employer may retroactively recalculate overtime for past workweeks that additional compensation covers. 

Perhaps I should have warned you earlier there would be math involved! Once you know what the total amount will be of the non-discretionary bonus and have added it to all the other forms of payment that must be included, it is divided by the total number of hours worked during the workweek to calculate the employee’s regular rate of pay. Calculating the overtime rate is straightforward if the employee is paid at a singular hourly rate with no additional forms of compensation to add in or if the non-discretionary bonus just covers that one workweek. It is 1.5 times the hourly rate for any time over 40 hours. But if there are additional forms of payment to include (non-discretionary bonuses), the employer will need to calculate the overtime premium. 

But how do you do that?  

  1. Add up all the earnings (total hourly pay, non-discretionary bonus, etc.) for the time period the bonus covers. 
  2. Divide this by all the hours worked (including the overtime hours) during the time period the bonus covers. 
  3. Take this rate and multiply by .5 to calculate the premium overtime rate. 
  4. Multiply this premium overtime rate by the number of hours of overtime. 
  5. Pay the employee the difference between the overtime rate already paid in regular payroll and the premium overtime rate calculated with the non-discretionary bonus. 

Well, that seems complicated. Maybe an example will help? An employer has promised a bonus to employees based on attendance during their busiest four weeks of the season. Here’s what it might look like: 

 

Hours

 Pay Rate Pay OT Hours OT Rate OT Pay

Total Pay

Week 1 

 40  $15.00  $600.00  4  $22.50  $90.00  $690.00 

Week 2 

 40  $15.00  $600.00  3  $22.50  $67.50  $667.50 

Week 3 

 40  $15.00  $600.00  2  $22.50  $45.00 

$645.00 
Week 4  36  $15.00  $540.00  0  $22.50  $0.00 

$540.00 
Total  156    $2340.00  9    $202.50 

 

 

To continue the example, this employee was awarded a $500 non-discretionary bonus for this time period, but it hasn’t been included in the overtime pay rate yet, so the employer needs to determine how much overtime is owed. We are going to add the regular wages ($2,340.00) plus the overtime wages already paid ($202.50) plus the bonus of $500 for a total of $3042.50 over the 4 workweeks the bonus covers. 

Now we need to calculate the hourly rate with all the compensation included. Take the regular wages due ($2,340.00) add overtime worked at the regular hourly rate (9 hours x $15.00 for a total of $135.00) plus the $500 bonus for total earnings of $2,975.00. The new hourly rate is $2,975.00 divided by 165 hours worked which equals $18.03 per hour. To calculate the OT premium, we multiple $18.03 by .5 which equals $9.02. 

This means that the employee is due some additional overtime. When including the non-discretionary bonus, the employee should have received a premium overtime amount of $81.14 (9 hours of overtime at $9.02). They were already paid a regular overtime rate of $67.50 (9 hours of overtime at $7.50). So, the difference owed once the non-discretionary bonus was determined to be $500 is $13.64 ($81.14 minus $67.50). The employer should include the $13.64 in the next pay. 

It still seems a little complicated. Here are a few options to make it easier: 

  1. Use non-discretionary bonuses only with employees exempt from overtime. 
  2. Keep the non-discretionary bonus but instead of awarding it for a longer time period like a year or a month, make it a weekly bonus. Your payroll system is likely to be able to calculate the premium overtime rate for one workweek. 
  3. Find someone who is really good at the math to calculate it for you (here’s looking at you awesome payroll professionals)! 
  4. Design the bonus to be discretionary instead! 

Employees truly appreciate bonuses, so we do recommend putting in the work to come up with something that will show your appreciation for them, but still work with the needs of the business. Consult your HR Business Partner if you need assistance planning for bonuses! But let’s get ahead of it – what are you going to do about bonuses in 2023?