Bonuses Paid by Third Parties Excluded From Regular Rate for Overtime Calculation Purposes

Perhaps the most frequently violated provision of the Fair Labor Standards Act is that law’s requirement that non-discretionary bonuses be included in non-exempt employees’ regular rate of pay used for purposes of calculating overtime pay. On August 20, the Third Circuit Court of Appeals concluded that incentive bonuses paid to employees by third parties were properly excluded from the regular rate calculation.

In DOL v. Bristol Excavating, Inc., the employer served as a construction contractor to a principal that provided efficiency and completion of work bonuses to all workers on the project, including Bristol’s employees. During a DOL investigation of Bristol’s pay practices, the agency concluded that the bonuses paid by the principal should have been included in the employees’ regular rate, thereby increasing the overtime rate paid by the employer.

The district court agreed with DOL, and the employer appealed this decision to the Third Circuit. The appellate court reversed this decision, determining that the bonus payments were excludable from the regular rate calculation. DOL based its interpretation on regulations that define the regular rate to include all remuneration paid to the employee. The Third Circuit defined this to mean all compensation that the employer and employee agreed would be paid for the work. As long as the third party bonuses were not pass throughs initiated or managed by the employer, they can be excluded from the regular rate.

The court noted that DOL’s interpretation could discourage employers from allowing employees to accept such bonuses, thereby reducing their pay. The Third Circuit did find that a safety bonus paid by the principal was properly included in the regular rate because their employer tracked and reported bonus criteria, demonstrating a sufficient level of involvement to make this part of the employer-employee agreed upon compensation. According to this decision, absent such involvement or manipulation of employee pay, true third party bonuses can be paid to employees without affecting their overtime rate.

Source: Parker Poe