U.S. Department of Labor Issues New Opinion Letters: A Three-Part Series (Part One – Bonuses and the Regular Rate)

By Courtney Amelung - Shawe Rosenthal LLP

July 8, 2019

On July 1, 2019, the U.S. Department of Labor issued three new opinion letters that address compliance issues related to the Fair Labor Standards Act (“FLSA”).  These letters are official, written opinions by the Department’s Wage and Hour Division that respond to fact-specific scenarios posed by employers and employees alike.  We are going to address each of the opinion letters in separate blog posts over the course of the next week.  But for now, let’s dive into the first of the three opinion letters!

The first of the new opinion letters, FLSA2019-7, addresses the calculation of nondiscretionary bonuses paid on a quarterly and annual basis into the regular rate of pay for overtime purposes.

Scenario: Under the terms of a collective bargaining agreement, an employer pays a quarterly bonus and an annual qualification bonus based on fixed percentages of an employee’s straight-time rate and the journey straight-time rate, respectively.  The quarterly bonus consists of (1) 15 percent of the employee’s contractual straight-time hourly rate for each hour a straight-time rate is earned; and (2) 22.5 percent (1.5 x 15 percent) of the employee’s contractual straight-time hourly rate for each hour an overtime rate (i.e., 1 and ½) is earned.  The annual bonus is one percent of the employee’s journey straight-time hourly rate for 2,080 hours.  The employer calculates the employee’s weekly regular rate of pay without including the quarterly or annual bonus earnings.  Instead, the employer retrospectively recalculates the weekly regular rates for the bonus period to include the bonus earnings and pays the employee the difference in overtime compensation.  In making this recalculation, the employer averages the bonus earnings across the workweeks of the quarterly or annual bonus period, rather than using the actual bonus earnings in a given workweek.

DOL Opinion: With respect to the annual bonus, the DOL concluded that the employer is acting in conformity with FLSA regulations when it recalculates the regular rate for each workweek of the bonus period and pays the remaining overtime compensation due on the annual bonus.  29 C.F.R. § 778.209(a).  The DOL noted, however, that the employer need not include the annual bonus in the regular rate calculation until the employer can ascertain the weekly amount of the bonus at the end of the bonus period.  29 C.F.R. § 778.209(b).  But given that the employer can readily ascertain the proportionate amount of the annual bonus earned by the employee each workweek, the employer is required to retroactively include those exact proportionate amounts in the regular rate for each workweek, rather than averaging the bonus earnings across the workweeks.

With regards to the quarterly bonus, the DOL concluded that the employer need not recalculate the regular rate for each workweek because a bonus of 15 percent of the employee’s straight-time and overtime wages simultaneously includes all overtime compensation due on the bonus as an arithmetic fact.  Therefore, the quarterly bonus complies with the FLSA’s overtime requirements.

Thoughts for Employers: Employers who offer nondiscretionary bonuses to their employees should be sure to read this opinion letter in its entirety and evaluate their practices for payment of such bonuses.  It is crucial that employers accurately calculate their employees’ regular rate of pay and pay any overtime compensation due on a nondiscretionary bonus, so as to avoid the imposition of significant penalties.

Stay tuned for the next two installments of this three-part series!