As companies end the year, they often want to reward their employees with a bonus for a job well done. However, bonuses may have unintended consequences by changing their Regular Rate of Pay, thus changing their Overtime rate to a Blended Overtime rate. It is critical to understand when these two rates are used.
Understanding Regular Rate of Pay
To calculate Overtime correctly, you must first know the employee’s Regular Rate of PayThe Fair Labor Standards Act (FLSA) sets the amount paid for overtime “as a rate not less than time and one-half their regular rates of pay.” The Regular Rate of Pay is calculated by dividing the total pay for employment (except for the statutory exclusions) in any workweek by the total number of hours worked.
Because the Regular Rate of Pay is based on total pay in the workweek, including bonuses and commissions, the rate may differ from the employee’s hourly rate.
Defining Blended Overtime
Blended Overtime is a way to simplify payroll calculations when an employee’s Regular Rate of Pay changes due to factors like shift differentials, bonuses, or other forms of compensation. It ensures employees are properly compensated for their overtime hours while considering their varying pay rates.
Discretionary vs. Non-Discretionary Bonuses
To better grasp the implications of Blended Overtime and its relation to bonuses, it is essential to differentiate between Discretionary and Non-Discretionary bonuses:
Discretionary Bonuses are excludable from the Regular Rate of Pay calculation. Discretionary bonuses are typically granted at the employer’s discretion. A bonus is discretionary only if all the statutory requirements are met:
- The employer has the sole discretion until at or near the end of the period that corresponds to the bonus to determine whether to pay the bonus,
- The employer has the sole discretion until at or near the end of the period that corresponds to the bonus to determine the amount of the bonus and,
- The bonus payment is not made according to any prior contract, agreement, or promise, causing an employee to expect such payments regularly.
Common discretionary bonuses include an employee of the month award, referral bonuses to employees not primarily engaged in recruiting, special recognition for handling an irate customer, and other one-time bonuses. The label assigned to the bonus and the reason for the bonus do not conclusively determine whether the bonus is discretionary. While a bonus may be labeled discretionary, it is not an excludable discretionary bonus if it does not comply with the statute’s provisions.
Non-discretionary bonuses, on the other hand, are predetermined and guaranteed in advance, often stipulated in employment contracts or company policies. Non-discretionary bonuses are part of an employee’s regular compensation and must be incorporated into the calculation.
Examples of non-discretionary bonuses that must be included in the Regular Rate of Pay include:
- Bonuses based on a predetermined formula, such as individual or group production bonuses
- Bonuses for quality and accuracy of work
- Bonuses that are announced to employees to induce them to work more efficiently
- Attendance bonuses
- Safety bonuses (number of days without safety incidents)
Calculating Blended Overtime with Bonuses
Here are practical examples to illustrate how Blended Overtime works when considering a bonus:
Example #1: Non-discretionary bonus
Sarah, a non-exempt employee, earns $20 per hour and receives a $100 non-discretionary bonus for perfect attendance during the quarter.
Sarah worked 45 hours that week. The following is an example of how to compute overtime pay based on the employee’s Regular Rate of Pay:
$20.00 per hour x 45 hours = $900.00 (compensation for straight time)
$900.00 + $100.00 (bonus) = $1000.00 (compensation plus bonus)
$1000.00 ÷ 45 hours = $22.22 (Regular Rate of Pay)
$22.22 x .5 = $11.11 (half-time premium pay rate for Overtime)
$11.11 x 5 Overtime hours = $55.55 (Overtime pay due)
$1000.00 + $55.55 = $1055.55 (Total due)
In this example, the non-discretionary bonus is included in the calculation of Blended Overtime. This calculation ensures that employees receive just compensation for their extra hours worked.
Example #2: Shift differential plus non-discretionary bonus
Fred, a non-exempt employee, is paid $15.00/hour plus an evening shift differential of $1.00/hour for all hours worked during an evening shift. The employee worked 45 hours, of which 30 hours were during evening shifts, in a week. The employee also earned a $100.00 bonus that week that was promised for helping to produce a special order for a customer two weeks earlier than previously scheduled.
$15 per hour x 45 hours = $675 (compensation for straight time at $15 hourly rate)
$1.00 x 30 hours = $30 (shift differential for the evening shifts)
$675 + $30 (shift differential) + $100 (bonus) = $805 (compensation plus differential and bonus)
$805 ÷ 45 = $17.89 (Regular Rate of Pay)
$17.89 x .5 = $8.95 (half-time premium pay rate for Overtime)
$8.95 x 5 Overtime hours = $44.75 (Overtime pay due)
$805 + $44.75 = $849.75 (Total due)
Example 3: Non-discretionary bonus and an excludable discretionary bonus
Rose, a non-exempt employee, is paid $18.00 per hour and receives a $50.00 bonus promised in a particular week for helping to produce a special order for a customer two weeks earlier than previously scheduled. Rose also receives a $100.00 on-the-spot bonus that week (for employee of the month, which is an excludable discretionary bonus). Rose worked 43 hours that week.
$18.00 per hour x 43 hours = $774.00 (compensation for straight time)
$774.00 + $50.00 (non-discretionary bonus) = $824.00 (compensation plus bonus)
$824.00 ÷ 43 hours = $19.16 (Regular Rate of Pay)
$19.16 x .5 = $9.58 (half-time premium pay rate for Overtime)
$9.58 x 3 overtime hours = $28.74 (overtime pay due)
$824.00 + $28.74 +$25.00 (discretionary bonus) = $877.74 (total due)
Understanding the Regular Rate of Pay and its interaction with bonuses is essential for employers to maintain compliance with federal labor laws. Organizations can improve employee satisfaction and legal adherence by distinguishing between discretionary and non-discretionary bonuses and correctly calculating Blended Overtime.
How can we help?
As you can see, Blended Overtime can get more complicated as more Discretionary and Non-Discrestinary bonuses are added to calculate the Regular Rate of Pay.
Time Equipment Company’s world-class time and attendance solution calculates Blended Overtime rates based on your parameters. Employees can transfer to different roles, and the system automatically applies the correct rate for the position. In addition, premium rates can be added for various purposes, including shift differentials, weekends, or locations. For more information about Blended Overtime, contact Time Equipment Company at firstname.lastname@example.org or 800-997-8463.