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September 23, 2010
Calculating Non-Discretionary Bonuses

In a BLR webinar entitled "Avoid Startling High Fines and Expensive Lawsuits Based on Failure to Pay Overtime on Bonuses," Clint D. Robison, Esq. from the Los Angeles office of Hinshaw and Culbertson LLP described a methodology for calculating a nondiscretionary bonus:

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  • Step 1: Regular pay = total pay for workweek + additional compensation – exclusions
  • Step 2:Regular rate of pay = regular pay divided by total hours worked
  • Step 3: Premium pay for overtime = regular rate of pay x 0.5 x (total hours worked – 40)
  • Step 4: Total weekly compensation = total pay for workweek + premium pay for overtime

Applying this methodology to an employee who earns an hourly rate of $8.00 and works 46 hours in a workweek, as well as earns a one-time $25 holiday bonus and a previously-promised $10 bonus for perfect attendance:

  • Step 1: Regular pay = ($8.00 x 46 hours) + $10 = $378.00
    • The one-time $25 holiday bonus can be excluded
    • The $10 perfect attendance bonus cannot because it was promised before work began and is contingent upon the number of hours worked
  • Step 2: Regular rate of pay = $378/46 hours = $8.22/hour
  • Step 3: Premium pay for overtime = $8.22 x 0.5 x (46 – 40 hrs) = 8.22 x 0.5 x 6 = $24.66
  • Step 4: Total weekly compensation = $368 + $25 + $10 + $24.66 = $427.66

Possible solutions to potential compliance problems include:

  • True discretion -- the language of the bonus plan and the administration of the plan should show "discretion"
  • The percentage bonus tool is very helpful for compliance, but there are some caveats to implementation
  • Look before you leap. Give due consideration before creating and implementing a new bonus plan
  • If you have an existing bonus plan, it's probably time for a an internal compliance audit

Clint D. Robison, Esq. is a an attorney in the Los Angeles office of Hinshaw and Culbertson LLP (www.hinshawlaw.com) and Chair of its Employment Practice Liability subgroup. He provides counseling, litigation and risk management services to medium- and large-sized public and private entities and handles all aspects of employment litigation and advice including wage and hour matters, discrimination claims, employment contracts, trade secret issues, retaliation claims, sexual harassment claims and Americans with Disabilities Act (ADA) issues.

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