With the Department of Labor’s (DOL) decision to increase the salary threshold for employees to be exempt from overtime pay, many employers will need to reclassify employees to non-exempt status. This status entitles employees to 1.5 times their pay rate when they work beyond a 40-hour week. To stay ahead of overtime compliance concerns, employers should conduct an internal audit of their overtime procedures and consider using a “percentage bonus” as part of their strategy to adjust to the guidelines and stay compliant.
DOL Changes Necessitate Adjusting Overtime Compliance Procedures
Any employer that pays non-exempt employees bonuses should review overtime compliance obligations now. The DOL’s new rules will give more employees non-exempt status and goes into effect in early 2025.
Overtime compliance factors to review:
- New Salary Threshold: The U.S. Department of Labor’s (DOL’s) new salary threshold for the Fair Labor Standards Act’s (FLSA’s) “white-collar” exemptions will rise to nearly $59k. Only workers who pass the duties test and reach this threshold will be considered exempt from overtime pay obligations.
- Reclassification: It may become more cost-effective to reclassify employees to non-exempt rather than raise their salary to meet the threshold.
- Regular Rate of Pay: Non-exempt employees are entitled to overtime premiums based on their “regular rate of pay.” This includes all types of compensation (including bonuses). For this reason, the “regular pay rate” isn’t as simple as it may seem at first glance. Internal reviews require a thorough understanding of section 7(e) of the FLSA.
Enter the Percentage Bonus
Employers must consider bonus payments when calculating overtime under the FLSA. While most bonuses have to be included when calculating the regular rate, the percentage bonus allows employers to pay a bonus without factoring it into overtime pay calculations. This approach simplifies calculations. The bonus is calculated as a predetermined percentage of an employee’s total straight-time and overtime pay during the relevant period. To adhere to compliance standards, overtime pay must be included in the calculation. The predetermined percentage must not change in response to variations in hours worked, and the bonus amount cannot be a fixed sum that ignores fluctuations in overtime.
Alternatively, employers can distribute a bonus pool among employees based on their proportion of the total straight-time and overtime wages. Each employee’s share of the pool is calculated by dividing their wages by the total wages of all participants, then multiplying by the total bonus pool. This ensures that the bonus reflects the employee’s contribution to the overall work period, including overtime.
If an employer uses one of these percentage-based approaches to address the FLSA overtime ramifications of bonuses, it should also ensure the plan complies with standards in every way and is maintained properly going forward.
The DOL says the method may be used only for true bonuses–as in those that are properly applied to a sum and paid as an addition to total wages. Such bonuses are usually attributed to extra effort, as a reward for loyal service, or as a gift. The term is improperly applied if it is used to designate a portion of regular wages that employees are entitled to receive under their regular wage contract. As always, employers should evaluate where this type of plan complies with applicable state and local requirements and ensure these bonuses are accurately and clearly explained to employees.
The Bottom Line
The DOL’s changes necessitate changes for all employers to stay compliant. Companies may be able to use a percentage bonus to simplify the changes while staying compliant with the new rules. If you would benefit from a conversation with overtime compliance pros to address questions or concerns, please schedule a free consultation now.
