California Employers: Avoid High Fines and Expensive Lawsuits From Failure to Pay Overtime on Bonuses

Wednesday, October 27, 2010Presented by the Employer Resource Institute

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OVERTIME AND BONUS PAY:

A Potentially Explosive Mix of Wage and Hour Ingredients

Presented by: Clint Robison, Esq.

Incentive Pay in 2010 - Overview

Growing competition from nontraditional sources Shrinking employment pool Greater demands from shareholdersAs a result, we expect more from employees One way to increase performance is to base

compensation on performance or sales goals.

Employer Attitudes About Bonuses

Organizations’ decisions about compensationWill more companies introduce new financial

performance measures to 2010 annual incentive programs?

Is there more discretion in bonus payouts coming?

Is there an increasing range of performance for payouts?

Are others in my industry engaged in risk assessment plans?

Increased Risk in 2010 & Beyond

Coupled with more incentive pay plans, targeted sectors are becoming seeing compliance reviews from the Wage and Hour Division of the Department of Labor.

One bank agreed to pay $3.8 million in back pay penalties. There are more examples.

Department of Labor Audits

The US Department of Labor (DOL) has over 27 large divisions.

300 new officials have been hired for audits. Expect more audits in the coming months.Audits are not random. Reasons for audits ?

Cemex Suit for $5 Million

The DOL sued Cemex, accusing it of failing to properly pay overtime wages to about 2,000 ready mix drivers who worked in eight states, including Texas.

The suit estimated that the company owed more than $5 million in back wages to its drivers.

The suit followed an investigation by the DOL covering the three-year period.

Cemex Suit for $5 Million"Although the company has not admitted liability, we

thought we had reached an agreement with the DOL," according to the statement. "We are disappointed that the DOL has thrown out the agreement and decided to go this avenue."

The Labor Department contends Cemex paid its drivers a "piece rate" based on the amount of work they did as well as an incentive bonus when they worked more than 40 hours a week.

The incentive payments were allegedly not included in the calculation of overtime pay, which is required under federal law, according to the lawsuit.

Quik Trip Corp. Pays $750,000

QuikTrip Corporation, operating convenience stores and travel centers, agreed paid to pay nearly $750,000 in back pay to 3,800+ workers in 9 states.

Violations were disclosed in Arizona, Georgia, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma and Texas.

An investigation found that QuikTrip had violated the Fair Labor Standards Act (FLSA) by failing to pay the additional overtime premium due on performance-related bonuses.

 Quik Trip was recognized as one of Fortune Magazine’s “Top 100 Companies to Work For”. How do we reconcile this with the fine?

Wal-Mart’s Settlement: The Value of an Internal Risk Audit Wal-Mart Stores, entered into a settlement

agreement with the DOL regarding the manner in which the company calculates overtime pay.

Wal-Mart had failed to include periodic bonuses and other earned income in determining some associates' weekly average hourly pay rate, or "regular rate," which was used to determine associates' overtime pay.

The company also calculated the regular rate on a biweekly rather than weekly basis and did not properly account for overtime involving some managers in training and other associates.

Wal-Mart’s Settlement: The Value of an Internal Risk Audit

The settlement included no fines or penalties, and Wal-Mart adopted measures to prevent these errors from occurring in the future.

Approximately 87,000 current and former hourly associates were underpaid by at least $20 during the last five years.

Under the terms of the settlement, Wal-Mart paid these associates the amount of their underpayments -- plus interest -- totaling about $34 million.

Supplemental Pay in the U.S. Labor Market

2007 Supplemental Pay represented what % of private sector compensation costs?

2010 Supplemental Pay represented what % of private sector compensation costs?

Is the trend is upward? Comparison to paid leave? Comparison to insurance benefits?

Supplemental Pay Considered

What percentage of workers are in jobs with overtime pay?

What percentage of workers are in jobs with bonus pay?

Workers in which category of occupations have the highest percentage of supplemental pay?

Supplemental Pay by Occupation

Overtime varies widely by industry. Bonuses vary widely. What portion of the top 10 occupations with the

highest percentages of bonuses fall within these two broad categories? Management Occupations Business and Financial Operations

Non-Exempt Employees

Employees covered by the Fair Labor Standards Act (FLSA) 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 rates of pay.

The Act applies on a workweek basis. An employee's workweek is a fixed and

regularly recurring period of 168 hours -- seven consecutive 24-hour periods.

Non-Exempt Employees

It need not coincide with the calendar week, but may begin on any day and at any hour of the day.

Different workweeks may be established for different employees or groups of employees.

Averaging of hours over two or more weeks is not permitted.

Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned.

FLSA Exemptions

Some employees may be exempt from the overtime wage provisions.

There are three general categories: EXECUTIVE, ADMINISTRATIVE and

PROFESSIONAL.In order for an employee to qualify as being

EXEMPT and thus not be required to be paid at one and one half his or her regular salary, an employee need only qualify under one of these exempt categories.

Regular Rate of Pay

Under federal law, employers must calculate overtime pay based on an employee’s regular rate of pay. 

“Regular rate” is not necessarily the same as an employee’s “straight hourly rate.”  The calculation for “regular rate” in each workweek is: i) all compensation earned (including all hourly pay and “nondiscretionary” production bonuses), ii) divided by the number of hours worked in that week.

Payments Excluded from the Regular Rate

Discretionary bonuses Gifts Contributions to certain welfare plansPayments made to certain profit-sharing plansPayments to certain savings plansPay for foregoing holidays Pay for foregoing vacations

Regular Rate: Calculation Example

ABC its employees on a bi-weekly basis. If employees work all their scheduled work hours in a pay period, they are given a $100 bonus. If an employee works overtime, must this bonus be included in their regular rate of pay for overtime purposes?

The FLSA and Bonuses

Does the FLSA render bonuses unlawful? No.

It takes issue with certain types of bonuses and their impact on overtime compensation. The key distinction is between discretionary and non-discretionary bonuses.

Gifts & Holiday Bonuses

Bonuses given as gifts, such as at the holidays, may be excluded from the regular rate as long as the amount of the bonus is not dependent on hours worked, production, or efficiency.

It should not serve as a motivator for increased or more efficient performance.

In addition, a gift bonus may not be so significant that your employees consider it part of their wages rather than a gift.

Discretionary Bonuses

Federal regulations provide that a bonus is discretionary only if "both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly."

Important Requirements

The employer retains discretion as to the amount of the bonus payment.

Discretion is retained until a time close to the end of the period for which the bonus is paid.

The bonus payment can’t be made according to a prior agreement which would cause the employee to expect regular payment.

Percentage of Total Earnings BonusA percentage of total earnings bonus

incorporates the overtime into the bonus itself.

By calculating the bonus on total earnings during for a particular time period, which includes overtime pay for that period, the overtime component is built into the bonus, so additional overtime is not required.

Referral Bonuses

Bonuses paid for recruitment of new employees are not included in the regular rate of pay if all of the following conditions are met:

(1) participation is strictly voluntary; (2) recruitment efforts do not involve significant

time; and (3) the activity is limited to after-hours solicitation

done only among friends, relatives, neighbors and acquaintances as part of the employees’ social affairs.

Calculating Overtime – Time FrameOnce you've determined that a bonus qualifies

as compensable overtime wages, how do you handle the overtime calculations?

First identify the time frame over which the bonus was earned. This will depend on the circumstances.

Apportionment – Method A

Apportion the bonus based on workweeks. So divide a quarterly bonus among the number of weeks in the quarter.

Apportionment – Method B

Apportion based on hours worked during the timeframe.

The proper method of apportionment will usually involve an equal distribution of the bonus based on hours, weeks, or some other factor.

Bottom Line

For each week in which a portion of the bonus is added, the regular rate is increased and additional overtime compensation may be due.

If the employee didn't work more than 40 hours in that week, then no overtime is required.

If the employee worked more than 40 hours, you’ll need to recalculate to include the bonus.

They is to understand whether a bonus is excludable so that you can value the true cost of a bonus to your business.

Evasion Tactics - Don’t Try These!

Varying the rate of pay which decreases as the length of the workweek increases.

Designating some wages as a “bonus” even though the wages are already earned.

Artificially dividing the workday into straight-time and overtime portions. 

Weekly Comp CalculationStep 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

Example

An employee earns an hourly rate of $8.00 and works 46 hours in the workweek.

The employee also receives a one-time $25 holiday bonus and a previously promised $10 bonus for perfect attendance.

Application Step 1: Regular pay = ($8.00 x 46 hrs.) + $10 =

$378.00The 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 hrs. = $8.22/hr. 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

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.

Thank you!

Thank you for allowing us to share information ans solutions regarding Overtime & Bonus Pay with

you today.

Feel free to contact me if you have any questions: Clint D. Robison, Esq.

crobison@hinshawlaw.com310-909-8000

You can also follow us on twitter at “www.twitter.com/employerlawyer”

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• The California Labor Code vs. the federal Fair Labor Standards Act (FLSA)

• Who the California wage/hour laws apply to

• The Wage Orders that cover your organization

• Hours of work—including travel time, make-up time, meal and rest periods, and the definition of "hours worked"

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