Case study: incentive program

Aug. 1, 2004
After being terminated, an employee filed a claim for unpaid overtime. Because he paid the employee a salary and extra pay was provided through a bonus plan...

Bent Ericksen and Tim Twigg

After being terminated, an employee filed a claim for unpaid overtime. Because he paid the employee a salary and extra pay was provided through a bonus plan, the doctor thought he didn't have to pay overtime. The employee's work performance suffered due to the disagreement over this overtime issue, until finally the doctor felt he had no other alternative but to let her go. Once fired, the employee felt she had no other alternative than to file a labor board complaint against the doctor to get her money.


This doctor mistakenly assumed that by providing bonus pay, coupled with a salary, it would "make-up" for the fact that overtime was not being paid. Bonus and incentive plans are a highly recommended and proven way to provide motivation and "psychic ownership" in the practice. Good bonus plans provide a means for staff to participate in the improvement or increased success that a practice experiences and, at the same time, they protect the financial bottom line of the practice.

While having its merits, bonus/incentive compensation should not be confused with overtime pay or viewed as a substitute for having to pay overtime.

The determining factor in overtime is not bonus pay or whether you pay a salary, but rather an employee's exempt versus nonexempt status. Based on government definitions, most dental office employees are nonexempt and need to be paid overtime. For more detailed information about overtime qualifications, refer to our column in the February issue of Dental Economics.

Note: As of this writing, major new federal legislation is pending regarding changes to the Fair Labor Standards Act (FLSA). This represents the first major changes since the FLSA was first enacted in 1938. The FLSA provides the criteria for employee classifications relative to overtime, and the new legislation is scheduled to take effect on August 23. Again, individual state regulations may supersede the new legislation.

An additional consideration relative to overtime pay and bonus plans is that when determining the effective hourly rate for calculating overtime, all compensation received should be added together and averaged based on hours worked. Therefore, if you have a bonus plan in place, then bonus pay needs to be included with the regular pay to determine an "effective hourly rate." To determine the appropriate hourly overtime rate — since overtime is paid at time and a half — you multiply the averaged hourly compensation by 1.5. However, this provision does not apply to discretionary and/or one-time bonuses you might give, such as a holiday bonus.


1) Don't confuse bonus pay or your method of compensation (hourly, salary, daily) with overtime requirements.

2) Know the definitions and criteria relative to exempt versus nonexempt employee status .

3) Establish reasonable pay given the position, an employee's experience, length of employment, your local economy, and the need to be competitive. Having an established pay scale helps you when you hire. You simply determine the applicant's job skills, relate them to the appropriate pay scale, and pay the rate accordingly. The pay scale should be applied fairly and consistently and updated periodically based on the cost-of-living index for your particular area. Staff could be eligible for increases based on longevity in the office, improved performance, new job responsibilities, or the cost of living.

4) Don't pay in excess of the salary range you have established. Instead, implement a good bonus and incentive plan. The best way for the practice to increase an employee's pay over and above the salary structure is through a well-designed incentive program. The bonus program should be "self-liquidating," meaning that it must be paid for by a percentage of the increased business it induces. For more information regarding the components of a good bonus plan, contact our office and ask for our bonus plan reprint or for specific information about our BonusPro software program.

5) Pay overtime when it occurs, knowing that you can — as in the case of seminar attendance — pay at a "different capacity work rate." Be sure to include all appropriate compensation to determine the correct overtime rate.

These steps will help you avoid employment law problems while establishing fair, consistent, and clearly communicated compensation policies.

Bent Ericksen is the founder and Tim Twigg is the president of Bent Ericksen and Associates. For over 25 years, the company has been a leading authority in human resources and personnel issues, helping dentists successfully deal with the ever-changing and complex labor laws. Both authors are members of the Academy of Dental Management Consultants. To receive a complimentary copy of the company's quarterly newsletter or to learn more, contact them at (800) 679-2760 or at

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