On July 1, 2019, the U.S. Department of Labor issued a new wage/hour opinion (FLSA2019-7) that reminds us of a commonly overlooked overtime miscalculation. The employee asking for guidance is a worker who receives annual bonuses calculated as an extra 1% of the straight time pay earn over the course of the year. The more hours they work in a year, the higher their bonus.

This employee is also non-exempt, meaning that the employee is entitled to overtime pay for all hours over 40 worked in a workweek. For employees who are non-exempt but on salary, this means that the employer divides all pay earned in a pay period by the hours worked to get the “base” or “regular” rate for overtime. For employees who have an hourly pay rate, that is usually the “regular” rate for calculating overtime. Overtime pay is then calculated by taking the regular rate and multiplying by one-and-one-half. During the course of the year, this employee receives overtime pay calculated using this type of calculation.

The question for the Department of Labor was whether the annual bonus increases the base rate for the employee’s overtime calculation. Because the bonus is a pre-set percentage that must be paid at the end of each year, the Department of Labor agreed that this amount needed to be added to the “regular” pay amount once the bonus amount is determined at the end of the year. This means that the employer needs to retrospectively recalculate the regular rate for overtime pay at the end of the year. The recalculation is required by 29 C.F.R. § 778.209(a), which is a part of the federal Fair Labor Standards Act that addresses calculation of overtime.

Importantly, this recalculation is not as simple as taking the bonus amount and dividing by all regular hours worked over the year. Instead, the employer must allocate how much of the bonus was earned in each workweek (based on the hours worked) and recalculate the regular rate for each week based on that number. Only then, can the employer recalculate the additional overtime amount due. Therefore, this employee and all other employees with this pay structure are entitled to back overtime.

There were other aspects to this opinion that are also important but I don’t want to confuse the issues here. The bottom line is that this employer, like so many, don’t realize that non-discretionary bonuses change employee’s base rates for overtime and that they owe these employees adjusted overtime pay at the end of the year. Penalties for violating overtime laws are strict. Under the Fair Labor Standards Act, an employee can bring a lawsuit and recover twice the amount of unpaid wages, plus attorney fees and court costs. 29 U.S.C. § 216(b). Under New Mexico’s Minimum Wage Act, NMSA (1978) § 50-4-26, an employee can bring a lawsuit to recover three times the amount of unpaid wages, plus attorney fees, and the employee shall not be required to pay court costs.

If you have any questions about how this opinion letter or how federal or state wage and hour laws relate to your situation, please do not hesitate to call or email Deena Buchanan at 505-900-3559, deena@dbuchananlaw.com.