Halloween was last month and I’m sure there were many scary moments for the children of this country. What’s even more frightening than any ghost or goblin is the issue of not taking bonuses, spiffs, or commissions into account for non-exempt employees when paying for overtime.
Lately, my husband John and I have been astonished by how many contractors are unaware of the Fair Labor Standards Act (FLSA) requirement to take bonuses, commissions, and spiffs (or any other creative name used) for hourly employees or non-exempt employees into account when calculating overtime, much less complying with the law.
The FLSA is a federal law that not only requires a minimum pay per hour, but also sets the requirements on how overtime for hourly employees must be paid. FLSA sets minimum pay requirements, and some states set even more stringent requirements. Whether you think it’s fair or unfair is immaterial. It’s the law.
Under the FLSA, any bonuses earned during the pay period by non-exempt or hourly employees must be used in the calculation for overtime worked in the same pay period. For example, if an hourly employee works for $20 per hour for 40 hours in a pay period, earns $100 in bonuses for bringing in leads, selling maintenance agreements, etc., and works 10 hours of overtime, the overtime pay must be calculated using the $100 bonus as part of the hourly pay.
Here is an example of the calculation:
- 50 hours (40 hours regular pay + 10 hours overtime pay) x $20 an hour = $1,000
- He also was paid $100 for a bonus. His new hourly pay is $1,100 / 50 hours = $22. Half of that = $11.
- So in addition to the $1,100 (50 hours x $20 + $100 bonus), he must be paid $11 an hour for the 10 overtime hours = $110.
- His new gross payroll is $1,210 ($1,100 + $110)
If the bonus is not taken into account in the overtime pay, the gross payroll would be calculated as:
- 50 hours x $20 an hour = $1,000. Plus 10 hours of overtime at $10 an hour additional = $100. Plus $100 bonus.
- His gross payroll would have been $1,200.
So, yes, the difference in gross payroll is only $10 for that pay period. Not that big a deal for one pay period, but it can accumulate quickly — over 50 weeks would make the annual difference in pay $500. That does become a big deal.
This overtime calculation applies whether the bonus or commission is paid in the same payroll period as earned or not. Even if the bonus or commission is paid monthly or quarterly, the bonus for the purposes of calculating overtime pay must be applied to the period earned, not when it’s paid.
As long as the bonus is tied to employee performance (bonuses for selling maintenance agreements, generating a lead, selling an accessory), it must be considered in the calculation for overtime. According to Ian Schotanus of Comprehensive Employment Service, “If you use a company-wide bonus (like a Christmas or year-end bonus), and this bonus is not tied to a specific employee’s performance (e.g., it’s tied to the overall company performance), then these bonuses would not (based on current legislation) need to be included in (overtime) calculations.”
Okay, good information to know, but why am I saying ignoring the FLSA is scarier than Halloween? According to Schotanus, lack of compliance with the current method of calculating overtime can result in fines up to $1,000 per incident (meaning every pay period that your company did not take the bonuses into consideration when calculating overtime) per employee (10 employees with a single incident = up to $10,000 PLUS back wages). Hopefully, that got your attention.
What would trigger an investigation of your company about compliance with the FLSA? A disgruntled current employee, a disgruntled ex-employee with a nasty attorney, an OSHA inspection where this lack of compliance was accidently uncovered, an IRS audit, a complaint that was deemed to be legitimate by the Wage and Labor Board.
Not sure what to do next? Talk to your attorney; talk to your CPA. And if you aren’t sure where to go for sound advice, visit the Comprehensive Employment Service
web-site at www.cesolution.com. Whatever you do, don’t wait until all that Halloween candy causes a cavity that won’t go away!
Vicki LaPlant has worked with HVAC contractors for the past 30 years as a trainer/consultant. She helps people work better together for greater success. Vicki is a longtime Contracting Business.com editorial advisory board member and can be reached by e-mail at [email protected], or by phone at 903/786-6262.