The information in this blog post refers to the proposed and final rules published by the U.S. Department of Labor in 2015-2016. To see the most recent information, click here.
All right, so maybe it’s not that complicated. But, if you’re planning to implement a pay structure that includes bonuses and commissions – or if you already have one – it’s important to understand how the Fair Labor Standards Act’s (FLSA) updated overtime rule may impact it.
A tale of two terms
When it comes to remuneration that’s given in addition to employees’ regular pay rates, the U.S. Department of Labor maintains that most payments can be classified as either discretionary or non-discretionary bonuses.1
Discretionary bonuses are given at the discretion of the employer and are not expected by the employee. On the other hand, non-discretionary bonuses are designed to incentivize and are expected by employees if predetermined criteria are met. Commissions typically fall into the non-discretionary category.
Changes for white-collar employees
Previously, neither discretionary nor non-discretionary bonuses generally could be included toward satisfying the standard salary threshold. But now, employers are permitted to satisfy up to 10 percent of the standard salary requirement with non-discretionary bonuses, incentive payments and commissions, provided these forms of compensation are no less frequently than quarterly.2
It’s important to note that the percentage amount is derived from the new standard salary threshold. In other words, no more than the equivalent of $91.30 per week ($913 x 10%), or $4,747 annually, can apply toward meeting the standard salary threshold.3
For example, Beth is a store manager who makes a base salary of $865 per week ($44,980 per year). Last quarter, she earned the equivalent of $192 per week in performance-related bonuses. Of that bonus, only the equivalent of $91.30 per week is allowed to be used to push Beth’s weekly salary above the new threshold. Under this scenario, Beth likely meets the standard salary level requirement for exemption, because her $865 base weekly salary plus $91.30 of allowable non-discretionary bonus totals $956.30, which exceeds the $913 required minimum under the rule.
As another example, Jason is an assistant manager in the same store. He makes a base salary of $730 per week ($37,960 per year). Last quarter, he received the same performance-related bonus of $192 per week. While this bonus would push his weekly earnings to the equivalent of $922 – which is above the standard salary threshold – his employer is limited to using only $91.30 of non-discretionary bonus toward the total weekly salary requirement; his $192 weekly bonus exceeds the 10 percent requirement. Adding the maximum allowable $91.30 per week to Jason’s weekly pay rate of $730 totals just $821.30, less than the weekly threshold requirement of $913. Therefore, under this scenario, Jason does not meet the standard salary level requirement for exemption.
A slippery slope
It’s easy to see how this could cause concern for employers. Non-discretionary bonuses are the only type of bonuses that can count toward satisfying the standard salary threshold, meaning individual employees’ performance potentially could cause them to slip in and out of exempt status.
Enter the new, quarterly catch-up payment. According to the rule, if at the end of the quarter, the sum of the salary paid plus the non-discretionary bonuses and incentive payments paid does not equal the standard salary level for 13 weeks, the employer has one pay period to correct the shortfall.4 An employer has the option to pay the employee a lump sum to raise an employee’s earnings for the quarter equal to the standard salary level. If an employer chooses not to do this, an employee would be entitled to additional compensation for any overtime hours worked in the relevant quarter.
Highly compensated employees
While things have changed for employees under the standard exemptions, the rules surrounding how non-discretionary bonuses apply to highly compensated employees largely are the same:
- Non-discretionary bonuses, commissions and other incentive pay can apply toward calculating total annual compensation.
- Non-discretionary bonuses, commissions and other incentive pay cannot apply toward the standard salary requirement.5
- Catch-up payments for highly compensated employees can occur on an annual basis.6
Inside and outside sales employees
The final rule also doesn’t change how the FLSA applies to employees who meet the outside sales exemption or the Section 7(i) retail exemption.7
Ultimately, the rules surrounding non-discretionary bonuses can be complicated, and are often case-specific. Consulting legal counsel is your best bet to ensure pay structures that include bonuses and commissions are in compliance with the FLSA.
The content of this blog is intended to keep interested parties informed of legal and industry developments for educational purposes only. It is not intended as legal opinion or tax advice and should not be regarded as a substitute for legal or tax advice.