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New Overtime Guidance explains Lump Sum Bonuses!

Good morning, Ladies and Gentlemen. And welcome to the People Processes podcast. My name is Rhamy Alejeal and I’ll be your host today. I’m the CEO of People Processes. And on this podcast, we dive deep into the tools, loans and yes, processes that you need to know in order to scale and grow your organization. We help organizations all across the United States streamline, optimize, implement and revolutionize their HR operations. We’ve helped hundreds of companies and thousands of HR leaders across the world get their people processes right. 

Today, we’re talking about a new guidance that came from the FLSA that explains how to handle a lump-sum bonus, a little bit more in depth than we’ve had in the past. I really am excited about this because it answers some questions that have been pending for 60 years. Before we go too deep though, I want to ask you to please subscribe to our podcast. It makes a huge difference to us. You can find us on iTunes, Google podcast, Spotify, Stitcher, pretty much any pod catcher of your choice. You can also subscribe @peopleprocesses.com, which will give you access to some exclusive subscriber only content. 

Department of Labor regulations provide that the bonus amount is added to the employees other earnings for the week. Total earnings are divided by the total hours worked to arrive at the regular rate. So they make 1000 bucks. They worked, well, let me do it easier. They made for a hundred bucks. They work 40 hours a week, they make 10 bucks an hour, you give them $100 bonus, and now they’re making an extra $2 and 50 cents per hour for 1250. Right? And that’s their regular rate of pay. If they work 4142 4344 hours, then that regular rate of pay is multiplied by 1.5 to give you that overtime rate of pay. But what if the bonus covers multiple work weeks? That was the issue addressed by the DOL’s Wage and Hour Division and their new opinion letter. We haven’t linked on our website, it’s WHD Opinion Letter FLSA 2020-1. It’s from January 7, 2020. 

Alright, so let’s take a fact here. An employer informed its employees in advance that they would receive a lump-sum bonus of $3,000 if they successfully completed 10 weeks of training and agreed to continue training for an additional eight weeks. Employees did not, however, have to actually finish the additional eight weeks to receive the lump-sum bonus. For example, if an employee completed the ten weeks of training and signed up for the additional eight weeks, the employee received the bonus even if he or she only completed one week of the additional training and dropped out. 

In the scenario that was presented to the DOL, an employee who received the lump-sum bonus ordinarily worked 40 hours per week. However, in week 5 of the 10 week original training, the employee worked 47, and in week 9 the employee worked 48 hours. The employer asked for advice on how to count the bonus and the employee’s regular rate for the weeks that the employee worked overtime. 

The DOL gave a little conclusion. So in its opinion letter, the Wage and Hour Division concluded that it was appropriate for the employer to use Method #1—that is, to allocate the lump-sum bonus over three times. And equally to each week have a 10 week training period. According to the opinion letter each week of the 10 weeks counted equally and fulfilling the criteria for the bonus, since missing any week would disqualify the employee from receiving the bonus. Moreover, there were no facts being inappropriate to assume equal bonus earnings per workweek, and a court has held that dividing a bonus equally among workweeks is not unreasonable even if the employee worked more or less than 40 hours in a given week. That case link to our site as well as its Vasquez vs TVC admin. 

Bottom line. Assume that the employee in the scenario presented to the DOL normally earns $10 per hour straight time. Using Method 1#, the employer would allocate the $3000 bucks equally over the 10-week bonus period, adding $300 to the employee’s pay for each week to be included in calculating the employee’s regular rate of pay. So, for example, in the week that the employee worked 47 hours, the employee’s straight-time earnings would come to$ 770 bucks. That’s (47 hours x $10 bucks + $300 bucks), resulting in a regular rate of $16.38 (770 straight time /47 hours). Therefore, the employee will be entitled to an overtime pay of $24.57 (1 ½ x 16.38) for each one of the seven overtime hours, right? So 2447 times seven.

By comparison using this Method, Method #2 would allocate the bonus on an hourly basis. And that would mean that they’re actually paid more. I’m not going to go through the math, but because podcasts are great for math, as I’ve learned, the long and short is when you have a bonus. It’s normally right. Well, it’s totally fine normally to allocate it evenly over the weeks in which the bonus was earned. As long as the earnings were similar each week. It’s not about the hours worked. If, for example, any given week, they could have lost the bonus because of their action, then it’s probably safe to assume that you could have just distributed equally. If however, the hours themselves are the thing that generate the bonus then you need to distribute using Method #2, dividing out by the number of hours worked each week makes a big difference. If you don’t know what the heck I’m talking about, by the way, what do you mean when I give a bonus I have to go back through and up my overtime. You’re missing something, check out our academy, academy.peopleprocesses.com or reach out to us on social media. There are some past episodes where we’ve gone into depth on this. 

Just a quick reminder, bonuses come over a pay period, when did they earn the bonus. And if they earned overtime during that period, by giving them a bonus, you are adjusting their regular rate of pay, which means they do additional overtime. There are quick and easy ways around this, primarily, around bonusing a percentage of pay rather than a flat amount. If you’re going to do a flat amount, you have to keep in mind that the period in which they earn the bonus, you have to go back and recalculate overtime. Hope that’s helpful. You need help, contact us social media, Twitter, Facebook, LinkedIn, Instagram, love to hear from you. Again, my name is Rhamy Alejeal. I appreciate you tuning in today. It’s time for you to go out there, get your work done and have a great day.

About the author, Rhamy

Rhamy grew up watching and working with his mother and grandmother in the senior insurance market. This familiarity with the struggles faced by people trying to navigate the incredibly complicated and heavily regulated healthcare market led him to start Poplar Financial while working on his degree at the University of Memphis. After completing his MBA and Bachelors in Finance and Economics, Rhamy guided Poplar Financial through the disruptive opportunity that is the Affordable Care Act. Since then Poplar Financial has received numerous awards from major insurance carriers and has completed its fourth year in a row of doubling in size. Now his team focuses on the processes around human resources and specializes in providing companies with between 20 and 1000 employees with the payroll, benefits, and HR needs.

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