The United States is currently experiencing a labor shortage unlike ever seen before. Simultaneously, the “Great Resignation” continues. According to the U.S. Bureau of Labor Statistics, 4 million Americans quit their jobs in July 2021 while a record-breaking 10.9 million jobs remained open. These current phenomena lead to employers creating creative strategies to retain workers. However, those creative strategies must still comply with the Fair Labor Standards Act (“FLSA”).
Many Ohio employers are offering incentive pay and sign-on bonuses as a way to retain workers. However, the incentive pay and sign-on bonuses may need to be included in overtime calculations depending on the way that the incentive pay is implemented. Under the FLSA, non-exempt employees must receive overtime pay for hours worked in excess of 40 in a workweek at a rate not less than time and one-half their regular rate of pay. 29 U.S.C. § 207(2)(C).
Incentive pay should be included in an employee’s rate of pay when the incentive is hazard pay, says the most recent guidance on the topic. But, what if it’s not hazard pay but the incentive pay is designed to simply to retain the workforce? It depends if the incentive pay is a non-discretionary or discretionary bonus. Non-discretionary bonuses are included when determining the employee’s regular rate of pay used to calculate overtime; discretionary bonuses are excluded.
- The employer must retain the sole discretion regarding the amount of the bonus;
- The employer must retain the sole discretion regarding whether to pay the bonus; and
- The bonus cannot be made as a part of a contract, agreement, or bonus.
If the bonus does not meet the above requirements, the bonus is a non-discretionary bonus unless it is exempt under other FLSA provisions. As most employers choose to announce the incentive pay to retain and recruit workers, incentive payment becomes a non-discretionary bonus because the employee has been promised the payment via the announcement, and therefore, incentive payments must be included when calculating an employee’s overtime.
Employers who violate the FLSA and do not include incentive pay in overtime calculations could face a lawsuit. Recently, Gold Standard Enterprises faced a federal class action lawsuit because Gold Standard Enterprises failed to include a $2 per hour temporary bonus in the employees’ overtime calculations. This case is currently settling out of court. This case should be an example for employers nationwide to comply with the FLSA overtime regulations from the beginning to avoid the tremendous legal fees associated with defending a class action lawsuit.
Similarly to incentive pay, sign-on bonuses are also non-discretionary bonuses because the sign-on bonuses are announced to the applicants to recruit them. When the employee does start with the company, the employee is expecting the sign-on bonus due to the employer’s announcement.
Bugbee and Conkle, LLP is experienced in navigating the labor shortage and counseling clients with retention strategies that are compliant with both federal and state law. Please reach out to us with any questions.