How to Calculate Bonuses into a Regular Rate of Pay for Overtime Purposes

The Fair Labor Standards Act (FLSA) requires that all nonexempt employees be paid at least minimum wage and overtime at time and a half of their "regular rate" for all hours worked over 40 in a workweek.

The regular rate (the rate at which the time and a half for overtime is calculated), can include more than just the employee's normal salary or hourly rate. Generally, the regular rate also encompasses all compensation provided to the employee as part of their employment, such as bonuses.

Therefore, employers must be sure to properly calculate overtime pay on a weekly basis for a nonexempt employee, particularly when the nonexempt employee receives additional compensation outside of their normal hourly pay rate.

This how-to guide serves as a tool to help calculate the regular rate for overtime purposes when nonexempt employees receive additional bonus compensation.

Step 1: Determine if a Bonus Must Be Included in the Overtime Pay Calculation

As a general rule, any bonus given to employees as a means of motivating job performance, productivity, quality or accuracy must be included in the regular rate of pay. See Must bonuses be included in overtime pay calculations?

For example, commissions, incentive pay, gainsharing and perfect attendance awards would be considered bonuses and must be included in the regular rate when calculating overtime for a particular workweek. There are some exceptions, though, the three most common being:

• Holiday/gift bonus. This type of bonus is excluded as long as it is not linked to hours worked or production.
• Discretionary bonus. This type of bonus is excluded as long as it is not known or announced in advance to serve as a motivator for performance.
• Percentage of total earnings bonus. This type of bonus uses all overtime paid as part of the "total earnings" calculation. Therefore, this type of bonus would not need to be factored into the employee's regular rate of pay.

Step 2: Define the Time Frame

The next step is to identify what time frame the bonus covered. For example, if the bonus was for work performed during the week, the time frame would be the workweek. If the bonus was for working on a special project last quarter, the time frame would be the quarter, with the bonus amount divided evenly either per week or per hour worked.

Overtime is always calculated per workweek. This means as bonuses vary throughout the year, so will the regular rate of pay (for which the time and a half is based on) for the weeks in which a bonus is paid.

Step 3: Calculate the Regular Rate of Pay for the Time Frame

In the week that a bonus is earned, the employee's rate of pay changes to incorporate the amount of the bonus. The bonus is not lost, it is simply expressed as part of the regular rate rather than a stand-alone amount.

For example, a $12 hourly rate will bring, for an employee who works 46 hours, and receives a production bonus of $46 for the week, a new regular rate of pay of $13 an hour (46 hours at $12 yields $552; the addition of the $46 bonus makes a total of $598; this total divided by 46 hours yields a regular rate of $13).

New regular rate = (all hours worked x hourly rate) + bonus

all hours worked

Step 4: Calculate Total Compensation Due

With the understanding that overtime must be paid at one-and-one-half times the new regular rate of pay, there are two ways of calculating the total compensation due to the employee.

Option 1

Pay the first 40 hours at the new regular rate, plus the overtime hours at one-and-one-half times the new regular rate.

For example, the employee in Step 3 is entitled to be paid a total wage of $637 for 46 hours (40 hours at $13 ($520) plus 6 hours at $19.50 ($117)).

Total comp = (nonovertime hours x the new regular rate) + (overtime hours x (new regular rate x 1.5))

Option 2

Pay all hours worked at the new regular rate (including the overtime hours) and add to that half of the new regular rate times the number of overtime hours worked.

For example, the employee in Step 3 is entitled to be paid a total of $637 for 46 hours (46 hours at $13 ($598), plus 6 hours at $6.50 ($39)). In other words, all 46 hours are paid at "time," and those extra 6 hours get an additional "half" added onto the total.

Total comp = (all hours worked x new regular rate) + (overtime hours x (new regular rate x .5))