As many clients have had difficulties maintaining staff in the past couple years I have seen more and more signs up for bonuses for workers. Additionally, I've seen new client addendums from larger MSP's with strict language requiring vendors, such as ourselves, to pass through these bonuses with a very modest fee to cover taxes. While many organizations are simply signing this language and passing the bonus along, what isn't being considered is the vendors obligations under the Fair Labor Standards Act.
Briefly stated, if you put such terms on that bonus that associates can expect it, then you have changed the bonus from discretionary to non discretionary. Discretionary bonuses are simple; :Hey Bob, loved the way you handled that call yesterday. You're a find example of a good worker. Heres $500". In this case, the companies only obligation is to pay the taxes on that $500.
However, if the client forces you to lay out their terms for the bonus: From date A to date B, associates must be in good standing, maintain quality levels in the 90% range, and have no absenteeism. If these terms are met, the associate will receive a bonus of 2000. This bonus has with it the start date, the end date, and the criteria for meeting the bonus. This is no longer a vague promise of a bonus at some future date, but a real, tangible promises to perform if these criteria are met. Why is that a problem?
Per the FLSA, Non discretionary bonuses must be factored into the effective hourly rate for associates earning overtime pay. Lets use our previous example: to qualify for this bonus the associates must work from January 2, 2023 to January 27 with no absences and while meeting quality and production standards. Lets say the associate typically earn $20 per hour and has a standard 40 hour work week but works a little overtime. That means this bonus period effectively covers 160 hours and the associate is awarded their $2000. This additional 2000 must be factored into the associates previous worked weeks to determine their average hourly rate for purposes of overtime. You CAN'T simply take their standard rate x 1.5. Per federal law you must re-calculate their effective rate and pay the overtime based off the new amount retroactively.
In our original example, associate works the following schedule:
Week 1: $20 per hour x 40 hours per week (800), they then picked up 8 hours on a Saturday at $30 (8) = 240. Grand total that week of 1040 before taxes.
Week 2: $20 per hour x 40 hours per week (800), they then picked up 8 hours on a Saturday at $30 (8) = 240. Grand total that week of 1040 before taxes.
Week 3: $20 per hour x 40 hours per week (800), they then picked up 8 hours on a Saturday at $30 (8) = 240. Grand total that week of 1040 before taxes.
Week 4: $20 per hour x 40 hours per week (800), they then picked up 8 hours on a Saturday at $30 (8) = 240. Grand total that week of 1040 before taxes.
Grand Total of $4160 net, right?
However, now that 2000 bonus must be factored in. 2000/4 weeks is 500 per week. So the new effective rate is ($20/hr x 40 hrs) = 800+500 = 1300. Now to determine the hourly rate you divide 1300 by the hours worked 1300/ 40 = $32.5 is their new adjusted hourly rate. So that Saturday of overtime went from being 8 x$30 per hour to 8 x (32.5 x 1.5) or 8 hours at $48.75 per hour.
Extrapolated out over the entire bonus period, the employer pays out the $2000 in a bonus as well as an additional $600 that had to be calculated for OT hours worked. The more overtime hours worked, the more expensive this prospect becomes; particularly in states like CA where OT rules are more complicated. Failure to recalculate overtime based on a non discretionary bonus is wage theft. Associates can complain to the Dept of Labor for an investigation and audit. Typically, they can call for triple damages to be paid out to the associate for the company's error.
If you have any questions, please contact the Dept of Labor. Don't let the client put you on the hook for their bonuses.
Ann Arbor MI