FLSA Impact on Variable Pay Plans

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Variable pay programs are becoming more common for non-exempt employees. The new FLSA regulations have clarified the impact on overtime pay and the standard threshold salary level for FLSA exemption. For non-exempt employees, any non-discretionary bonus needs to be included in their overtime pay. Plus, under the new regulation, 10% of any bonus can be included with the salary to determine whether pay exceeds the standard pay threshold of $47,476. Other factors may impact the cost and effectiveness of variable pay programs. To learn more or discuss this further contact the Wilson Group at info@wilsongroup.com.

Variable Pay Under the New FLSA Regulations

Many companies either offer or are expanding variable programs to include non-exempt employees. There are two key things employers need to know about variable pay relative to being compliant with the Fair Labor Standard Act:

  1. Most bonus payments made to non-exempt employees must be included as part of the base wages when calculating overtime.
  2. For the first time, up to 10% of any bonus paid to an employee to be included in the standard salary level test (as of December 1, 2016), provided it is paid at least quarterly.

The FLSA requires that any payment based on a bonus or non-discretionary incentive program needs to be included as part of the base wages for non-exempt employees. This can be done by either increasing the amount paid in overtime by the base wage plus bonus payment. Or, the bonus payment can be paid as a percent of the total earnings (base wages and bonus payments) for the non-exempt employees for the performance period. This has not changed under the new FLSA regulations.

Discretionary bonuses do not need to be included in the calculation of overtime pay; non-discretionary bonuses do. Non-discretionary bonuses include those compensation payments to employees that are intended to encourage them to work more productively, rapidly, steadily or efficiently, or to remain with the company. These include programs such as commission programs, Gain Sharing or Goal Sharing programs, production incentives, and established profit sharing programs and retention, attendance or similar reward programs. A discretionary bonus program is one where the executive makes a decision to award bonuses based solely on discretion and is not done in accordance with any pre-established standards or goals.

There are some additional variable pay programs that may or may not be impacted by this regulation. Referral bonuses that are paid for the recruitment of a new employee is not included in the base wage or regular pay if the payment meets certain conditions. These conditions are (1) participation is voluntary, (2) recruitment effort does not involve significant time, and (3) activity is done after hours. For an attendance program, the bonus is included in the base wages and will need to be included in the overtime calculation. If employees receive a bonus for remaining with the company for a defined period of time (i.e., 6 months, 2 years, till the end of a project), the payment does need to be included in base wages and therefore the overtime payment needs to include these total earnings for the performance period in which the bonus is paid.

The new FLSA regulations, that will become effective December 1, 2016, have significantly increased the minimum salary requirement for the exemption tests. However, they permit up to 10% of any bonus paid to an employee to be included in the standard salary level test. The new standard salary for testing whether a position is exempt or nonexempt (in addition to the job functions tests) is $47,476 annual or $913 weekly. If an employee receives a salary and an additional 10% of salary as a bonus in excess of this threshold, then the position may be considered exempt (assuming it meets the job duties tests). This again only applies for bonus programs considered as non-discretionary as noted above. Further, the employer may make a “catch-up” payment to assure the individual exceeds the salary level test and therefore be exempt from overtime. Finally, the payment must be made at least quarterly or more frequently to be considered in the salary test.

Thomas B. Wilson, June 2016