The Hidden Pay Gap: How Bonuses and Overtime Can Shortchange Employees

Josephson Dunlap LLC

Bonuses, such as sign-on and retention bonuses, among many others, are designed to reward employees and attract top talent. However, many workers are unaware of how these bonuses should increase their overtime pay, leading to potential underpayment and other legal concerns.

The Overlooked Impact of Bonuses on Overtime Pay

Under the Fair Labor Standards Act (FLSA) and many, similar state laws, most bonuses must be included when calculating overtime pay. Promised or expected bonuses based on performance, attendance, or meeting specific goals must be included in overtime. Sign-on and retention bonuses often fall into this category, meaning they should increase workers’ overtime pay.

Where the Discrepancy Happens

Many employers mistakenly or intentionally unlawfully exclude bonuses from overtime calculations, resulting in underpaying workers’ overtime hours. For example, suppose an employee earning $20 per hour receives a $1,000 retention bonus spread over 10 weeks. In that case, their regular rate of pay (the pay rate on which overtime pay is calculated) increases to approximately $22.50 per hour. If this employee works overtime, their overtime rate should be $33.75 per hour (1.5 times $22.50), not $30 (1.5 times $20). If the bonus isn't included, they lose almost $3.75 per overtime hour worked.

Why It Matters

Missing out on proper overtime compensation leads to significant income loss over time, especially for workers who regularly work more than 40 hours a week. It also reflects larger workplace fairness and compliance issues, where workers are not fully compensated for their labor. Understanding how bonuses affect overtime ensures that workers are paid fairly and motivates employers to follow labor laws.

Legal and Financial Consequences

Failing to properly account for bonuses in overtime pay is a violation of federal and state laws. Employers can face lawsuits, fines, and be required to pay back wages and additional monetary penalties to workers. For workers, this can mean months or even years of lost income and getting properly compensated moving forward.

Know Your Rights

Workers should stay informed about how their compensation is structured and how bonuses impact over time. If you suspect your overtime pay isn't accurate, it may be time to ask questions or seek legal advice.

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