Common and Costly Employer Mistake: Not Paying Overtime Premium on Incentive Compensation

Most employers know that the Fair Labor Standards Act (“FLSA”) requires minimum wage and overtime to be paid to employees unless they are exempt. A common mistake, however, is when employers fail to properly factor certain incentive compensation into non-exempt employees’ regular rate for purposes of calculating overtime pay. This costly mistake can lead to class action lawsuits and actions by the U.S. Department of Labor (“DOL”) to collect back wages, liquidated (double) damages, and/or attorneys’ fees.

If non-exempt employees are paid a commission, non-discretionary bonus, or other incentive payment, such payment must be factored into the employees’ regular rate in order to compute any applicable overtime compensation. In the easy but unusual case, an incentive payment is paid on a weekly basis, so the employer simply adds such payment to the other wages earned in that particular week. This amount is then divided by the total hours worked during the week to obtain the employee’s regular rate. The non-exempt employee must then be paid an additional one-half times the regular rate for all hours worked over 40 in the week.

The harder, but more common case, is when an incentive payment cannot be ascertained by the regular payday, because, for example, it is determined monthly, quarterly, or on another basis. In such situations, employers must apportion the incentive pay back to each week in which the incentive was earned (for example, over the month or the quarter) and then recalculate any additional overtime premium that may be owed based upon the incentive. There are numerous acceptable methods to calculate this overtime “true up” payment on incentive pay, which are explained in the DOL regulations.

If an employer is in doubt about its overtime calculations, the employer should consider analyzing whether its calculation method complies with the applicable DOL guidance.

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