As one employer recently learned the hard way, failing to include incentive compensation (bonuses) when calculating earned over time is a costly mistake. Following a U.S. Department of Labor Wage and Hour Division (WHD) investigation, Younger Brothers Companies – a contractor based in Peoria, Arizona – has been ordered to pay $723,764 to 271 employees.

WHD investigators found several violations of the overtime and recordkeeping requirements of the Fair Labor Standards Act (FLSA).  Violations included failure to pay employees required overtime rates when they worked more than 40 hours in a workweek. Specifically, the employer failed to include all production bonuses and commissions in employees’ regular rates when computing their overtime rates. Excluding these amounts from the calculation resulted in workers being paid overtime at rates lower than those required by law. Additional overtime violations occurred when the employer failed to make any payment at all to some employees for hours they worked beyond 40 in a workweek. Failing to record those unpaid overtime hours also resulted in a FLSA recordkeeping violation.

Employers must ensure that they pay employees all the wages they have legally earned and that they are keeping accurate records of their hours.  The FLSA requires minimum wage and overtime to be paid to employees unless they are exempt. Misclassification can be costly. Even if properly classified, and entitled to overtime, failure to properly calculate overtime wages owed can be equally costly. A common mistake is the failure to include incentive compensation (i.e., bonuses) in the rate owed for overtime pay. This error can lead to class action lawsuits and actions by the U.S. Department of Labor (“DOL”) to collect back wages, liquidated (double) damages, and an award of attorney’s fees.

If non-exempt employees are paid a commission, non-discretionary bonus, or other incentive payment, such payment must be factored into the employees’ regular rate when computing any applicable overtime compensation. In the easy but unusual case, an incentive payment is paid on a weekly basis, so the employer simply adds such payment to the other wages earned in that particular week. This amount is then divided by the total hours worked during the week to obtain the employee’s regular rate. The non-exempt employee must then be paid at the rate of time and a half the regular rate for all hours worked over 40 in the week.

The harder, but more common case, is when an incentive payment cannot be ascertained by the regular payday. For example, it might be determined monthly, quarterly, or on another basis. In this case, employers must apportion the incentive pay back to each week in which the incentive was earned (for example, over the month or the quarter) and then recalculate any additional overtime premium that may be owed based upon the incentive. There are several acceptable methods to calculate this overtime “true up” payment on incentive pay, which are explained in the DOL regulations.

Overtime claims and calculations can be confusing. FLSA issues are truly a case in which prevention is the best medicine.  If you need guidance regarding overtime, or any wage payment issue, please contact the lawyers at Faulkner Law Offices, PLLC today. We can help you obtain your lawfully earned overtime. If you are an employer, we can help you evaluate employee classifications and proper overtime calculations to avoid these costly mistakes.