Bonus pay: Motivational and a possible compliance trap

Oct. 21, 2013
Bonus and incentive plans are a recommended and proven way to provide motivation and psychic-ownership for employees within the practice.

by Tim Twigg and Rebecca Crane

Bonus and incentive plans are a recommended and proven way to provide motivation and psychic-ownership for employees within the practice. A good bonus plan protects the financial bottom line of the practice while, at the same time, providing a means for your employees to benefit financially from practice growth. It's a great example of win-win.

While having their merits, bonus plans can also be a compliance trap for the unknowing dentist due to little known nuances in wage and hour rules. The trap stems from dental practices having nonexempt employees (about 95% of all dental employees). Nonexempt employees must be paid minimum wage or higher and must be paid time-and-a-half for overtime hours. "OK, but what does this have to do with bonuses?" you ask.

According to the Fair Labor Standards Act (FLSA), bonus pay must be included in overtime calculations for nonexempt employees. Therefore, if bonus/incentive pay is included in a given pay period and the employee has worked overtime, then you must calculate the employee's effective hourly rate in order to determine the correct overtime rate.

A dentist's failure to include the bonus pay in overtime pay calculations, and thus underpaying the employee, can result in a wage and hour claim for unpaid wages, along with ensuing penalties and fines. Determining whether you must include bonus pay in your calculations depends upon the type of bonus you provide.

Discretionary bonuses are excluded from an employee's regular rate of pay calculation and have no impact on overtime rates of pay. By definition, a discretionary bonus is one in which the payment and amount of the bonus is solely at your discretion, and not part of an agreement, contract, or promise. Bonuses that fall within this category are:

  • Payment made for gratuitous reasons
  • Bonuses given as gifts on special occasions, such as holiday bonuses, as long as these aren't measured by, or dependent upon, an employee's performance (i.e., hours worked, production, efficiency, etc.)
  • Bonuses made under a bona fide profit-sharing program that conforms to specific government regulations

Nondiscretionary bonuses are ones in which you have established specific criteria that must be met in order for a bonus to be paid out. The criterion often includes attendance, production, efficiency, quality, or quantity of work, or any other measurable performance standard. These types of bonuses must be included when calculating overtime pay.

Calculating "regular rate of pay" and overtime pay

While nonexempt employees can be paid many ways (hourly, salary, commission, piece rate), determining the effective "regular rate of pay" is required regardless of how the employees are paid once you know overtime has been worked. Here is how you determine the rate as well as the amount owed for overtime:

  • Step 1: Calculate the employee's "straight time pay"
  • Step 2: Calculate the employee's regular compensation, which is straight time pay plus all other pay, such as nondiscretionary bonuses
  • Step 3: Calculate the employee's regular rate of pay, which is all regular compensation divided by hours worked
  • Step 4: Calculate the employee's overtime compensation, which equals half the regular rate of pay multiplied by the number of hours worked over 40 in a week, or any applicable daily overtime threshold
  • Step 5: Calculate the employee's total compensation, which is regular compensation, plus overtime compensation

An added note

If you have a nondiscretionary bonus plan and, therefore, have to recalculate overtime rates when applicable, then you should determine, in advance, when that bonus pay is going to impact overtime pay.

The Department of Labor lets you, the employer, choose whether the bonus pay will impact only the week the bonus was actually paid or if it impacts the weeks or months during which the bonus was actually earned. Establish a method and stick to it. Frequent changes could be viewed as a subterfuge to avoid having to include the bonus pay in the employee's overtime pay calculation.

In summary

Bonus and incentive plans can be good for everyone -- employer and employee. For the employer, they can soften fixed costs, maintain recommended overhead percentages, and incentivize staff. For employees, they create a direct link to performance (growth, improvement, and success) and compensation, which is a very good thing. Be mindful of wage and hour requirements though, not to run afoul with overtime calculations.

Tim Twigg is the president of Bent Ericksen & Associates, and Rebecca Crane is a human resource compliance consultant with Bent Ericksen & Associates. For 30 years, the company has been a leading authority in human resource and personnel issues, helping dentists successfully deal with the ever-changing and complex labor laws. To receive a complimentary copy of the company's quarterly newsletter or to learn more about its services, call (800) 679-2760 or visit the website at www.bentericksen.com.

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