Buck Bond Group

The Clock is Ticking: Incentive Pay and the FLSA

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The U. S. Department of Labor’s (DOL) new overtime rules are still scheduled to go into effect December 1, 2016, even as efforts to block implementation continue.

"CFOs loathe expense surprises that hit the bottom line. If this topic is flying under the radar, now is the time to raise a red flag before a white one is needed. " Thomas V. Burke, Principal and Global Career Practice Leader

“Although an employee may exceed the new salary threshold (with or without incentive pay), that doesn’t mean the employee is automatically exempt.” Thomas V. Burke, Principal and Global Career Practice Leader

Under these rules, employers will be allowed to use nondiscretionary bonus, commission, and other incentive payments to satisfy up to 10% of the new salary threshold for a white-collar exemption from the Fair Labor Standards Act’s (FLSA) overtime pay requirements. This means that nondiscretionary incentive payments of up to $4,747.60 can be applied towards meeting the new standard salary level of $47,476 annually. Employees paid less than $47,476 per year (or less than $913 weekly) will automatically be nonexempt and eligible for overtime pay.

The change to include incentive pay to meet the new salary test was pitched by the DOL as a way to recognize “. . . that some businesses pay significantly larger bonuses.” While this sounds like good news, there are some potential pitfalls that employers who plan to use incentive pay to reach the threshold will want to consider.

Incentive pay does not define exempt.

While exempt employees often receive incentive pay, receiving incentive pay does not make an employee exempt. Rather, the employee’s type of job, job duties, salary basis, and salary level together determine exempt or nonexempt status.

Incentive pay is subject to special rules.

Under the new overtime rules, incentive pay can be counted towards meeting the new salary threshold of $913 weekly or $47,476 annually under the following conditions.

  • Incentive pay must be nondiscretionary (generally objectively tied to productivity or profitability).
  • Incentive pay can count towards no more than 10% of the new salary threshold.
  • Incentive payments must be made on a quarterly or more frequent basis, and a new salary test should take place when a payment is made.
  • A quarterly incentive payment of up to $1,186.90 ($4,747.60/4 = $1,186.90) may be credited against the salary threshold.
  • If the quarterly incentive payment is less than $1,186.90, the employer has one pay period in the following quarter to make a catch-up payment for the shortfall.
  • A catch-up payment only counts toward the prior quarter’s salary amount, not toward the salary amount in the quarter in which it is paid.
  • If a catch-up payment needed to retain an exemption is not made, the employee is entitled to overtime pay for all overtime hours worked during the quarter.
  • Incentive pay cannot be used to meet the standard salary threshold ($913 weekly) for Highly Compensated Employees (HCEs). However, employers may count bonuses, commissions, and other nondiscretionary compensation paid at least annually toward the HCE total compensation threshold of $134,004 annually.

It’s important to remember these conditions when designing and administering an incentive pay plan, if the intent is to use bonuses, commissions, or other incentive payments to satisfy the new exempt salary requirements.

What’s the difference between nondiscretionary bonuses and discretionary bonuses?

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 bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula.

By contrast, discretionary bonuses are those for which the decision to award the bonus and the payment amount is at the employer’s sole discretion and not in accordance with any preannounced standards.

– U.S. Department of Labor

Incentive pay for nonexempt employees is subject to overtime rates.

There is nothing in the new overtime rules that changes how incentive pay for nonexempt employees is treated for overtime purposes. When calculating overtime pay, nondiscretionary bonuses paid to nonexempt employees must be included in the regular rate of pay. While complying with this requirement may seem easy and straightforward, the actual calculations can be complicated.

Don’t lose sight of the duties tests.

The new overtime rules change long-standing salary tests and compensation tests for white-collar exemptions, but the duties tests have not changed. Although an employee may exceed the new salary threshold (with or without incentive pay), that doesn’t mean the employee is automatically exempt.

The new overtime pay rules are scheduled to take effect December 1, 2016. Legal challenges have now been filed to stop implementation, but there are no guarantees they will be successful. With the clock ticking, employers should continue to take steps to prepare for compliance.

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