Question: When the new FLSA overtime exemption rules go into effect on December 1, 2016, can bonuses and commissions be used to satisfy the standard salary level test?
Answer: Yes. For executive, administrative, and professional employees, you may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level requirement. In order to credit these payments toward the salary level test, they must be paid on a quarterly or more frequent basis.
Nondiscretionary bonuses and incentive payments (including commissions) are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Examples include individual or group production bonuses, and bonuses for quality and accuracy of work. Incentive payments, including commissions, are also considered nondiscretionary since they are generally based on a prior contract or understanding, and employees generally have a contract right to the commission promised.
By contrast, discretionary bonuses are generally paid without prior contract, promise, or announcement, and the decision to provide the bonus and the payment amount is at the employer’s sole discretion. An example would be an “on-the-spot” award made without announcement and at the employer’s sole discretion (e.g., an unannounced year-end bonus). Discretionary bonuses cannot be used to satisfy the salary level requirement.
If an employee does not earn enough of a nondiscretionary bonus or incentive payment in a given quarter to retain his or her exempt status, you may make a “catch-up” payment no later than the next pay period after the end of the quarter. You must make up for the shortfall (up to 10 percent of the standard salary level for the preceding 13-week period) in one pay period. This 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.
With regard to highly-compensated employees (HCEs), nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the $134,004 HCE total annual compensation requirement, but the employee must be paid at least the full standard salary level of $913 per week on a salary or fee basis to qualify for this exemption. If an employee’s total compensation in a given annual period does not meet the $134,004 threshold, the “catch-up” payment may be made within one month of the end of the annual period. Any such catch-up payment counts only toward the prior year’s total annual compensation. If the catch-up payment is not made within the timeframe allotted, the exemption is lost for the prior quarter and the overtime premium must be paid.