Question: We want to take this opportunity with the new overtime rule to offer bonuses on top of base salaries and need to understand how the 10-percent nondiscretionary bonus toward the annual threshold works under the new FLSA rules. Are we compliant if we provide quarterly bonuses and pay an exempt employee $46,200 before adding the bonus?
Answer: It depends. The new final rule states that employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the minimum salary threshold ($47,476), as long as those payments are made on a quarterly or more frequent basis. Therefore, in order to be compliant under the new rule, the bonus:
- Must be “nondiscretionary”; and
- Must only cover 10 percent of the minimum salary threshold ($91.30 per week or $4,747.60 annually) and be made on a quarterly or more frequent basis.
The distinction between discretionary bonuses and nondiscretionary bonuses is explained in 29 CFR § 778.211. A discretionary bonus is a bonus that remains completely within an employer’s discretion, which the employer exercises close to the end of the period for which the bonus is paid, and is in no way required by any contract, agreement, or promise such that employees may expect the bonus. In contrast, a nondiscretionary bonus is one which accrues to the employee automatically if the employee meets certain criteria established by the employer. Bonuses that the Department of Labor considers nondiscretionary include:
- Bonuses which are announced to employees to induce them to work more efficiently or to remain with the organization.
- Attendance bonuses.
- Individual or group production bonuses.
- Bonuses for quality and accuracy of work.
- Bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made (longevity pay, for example).
If the bonus is nondiscretionary, we can look to the second part of the test. The final rule allows nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the minimum salary threshold for white collar workers ($91.30 per week or $4,747.60 annually), provided that the bonus or commission is paid at least on a quarterly basis.
If an employee does not earn enough in nondiscretionary bonuses and incentive payments (including commissions) in a given quarter to retain his or her exempt status, you may make a “catch-up” payment at the end of the quarter. Employers have one pay period to make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13-week period). Any such catch-up payment will count only toward the prior quarter’s salary amount and not toward the salary amount in the quarter in which it was paid. If you choose not to make the catch-up payment, the employee would be entitled to overtime pay for any overtime hours worked during the quarter.
The Department of Labor has provided the following information to help clarify the rule regarding nondiscretionary bonuses:
- Each pay period an employer must pay the exempt salaried employee at least $821.70 (that is, 90 percent of the minimum salary threshold).
- At the end of the quarter, if the sum of the salary paid plus the nondiscretionary bonuses and incentive payments paid does not equal $11,869 (that is, the standard salary level multiplied by the 13 weeks of the quarter), you are allowed one pay period to make up for the shortfall.
- The shortfall cannot exceed $91.30 per week or $1,186.90 for the quarter, which is 10 percent of the minimum salary threshold.
- Any catch-up payment counts toward only the prior quarter’s salary amount. It will not count toward the salary amount in the quarter in which it ends up actually being paid.
In response to your question regarding an employee who earns $46,200 on an annual basis, you will be in compliance with the new final rule provided that the bonus is nondiscretionary and the bonus payments meet the above requirements.