Today’s FLSA Question: I am a city finance director responsible for paying our city’s public safety workers. The fire chief recently approached me with an interesting idea for new firefighters. During the recession the city lowered the starting wages for fire department employees significantly. This has impacted our ability to recruit and retain rookie firefighters. The chief would like to provide a large monetary “bonus” of several thousand dollars to fire recruits at the end of their probationary period (one-year). First, does this type of bonus need to be included in the firefighter’s regular rate? Second, if the bonus must be included in the regular rate, what is the best way to accomplish that while minimizing the financial hit to the city? The firefighters work very little overtime for the first four to five months of employment, however for the remainder of the year they will work significant amounts of overtime. This bonus could increase their regular rate significantly. I need to figure out how much this plan is going to cost us (beyond the initial lump sum bonus) before I can commit to supporting it.
Answer: You are wise to consider all the potential impacts from such a bonus plan. Discovering the financial impact after the bonus is paid could result in both a wage and hour violation and the likely elimination of any bonus being paid in the future. The bad news—from your point of view—is that the bonus you describe must be included in the firefighter’s regular rate of pay. Since all FLSA overtime must be at least time and one-half of the firefighter’s regular rate, failing to include the bonus in the regular rate will likely result in shorting the firefighter’s overtime rate of pay. The good news—from your point of view—is that the bonus can be structured in a way to minimize the overall impact on your rookie firefighters’ regular rate.
Let’s look at your questions in turn. First, does the bonus need to be included in the firefighter’s regular rate of pay? That answer is pretty clear. Department of Labor (DOL) regulations found at 29 C.F.R. § 778.211(c) require “[b]onuses which are announced to employees to induce them to … remain with the firm are regarded as part of the regular rate of pay.”
But now a bigger question remains. What is the best way to include a lump-sum bonus, paid at the end of the year, in a firefighter’s regular rate?
Department of Labor regulations require lump-sum bonuses “be apportioned back over the workweeks of the period during which it may be said to have been earned.” See 29 C.F.R. § 778.209. Or to use your example, the money attributable to the bonus should be spread out evenly across the whole year. Here is an example:
A firefighter receives a lump-sum bonus of $3,000 following the completion of his or her first year of service. As we discussed above, the FLSA requires this bonus included in the firefighter’s regular rate. For regular rate purposes only, the bonus should be equally apportioned across all 52 weeks of the previous year. This apportionment will result in the firefighter’s wages increasing by approximately $58 per week over the course of the year. This extra $58 (which has already been paid to the firefighter in a lump-sum) must be retroactively factored into the firefighter’s wages for each week. For the weeks that the firefighter did not work any overtime, there will likely be zero impact from this calculation. However, for the weeks the firefighter worked overtime, the regular rate must be adjusted to include the $58 in his or her weekly earnings. This will likely result in small amounts of additional FLSA overtime due to the firefighters that both received the bonus and worked overtime throughout the course of the year.
Based on your facts, here are a couple of important factors to consider. It is very important that your organization clearly communicates to the firefighters that the bonus is designed as a reward for successfully completing their probationary (first) year of employment. Additionally, the bonus should be paid as soon as “practicable” at the conclusion of the firefighter’s first year. Best practice would be to pay the bonus immediately upon successful completion of the first year.
Next, you mentioned that rookie firefighters do not work much overtime during the first few months of their employment. This factor benefits your organization. By apportioning the bonus over the course of the entire year, your organization will be able to avoid the regular rate implications associated with the bonus for the work periods in which no overtime was worked. However, at the end of the day, or should I say end of the year … the true cost of the bonuses will be slightly more than the actual amount paid in a lump sum to the individual firefighters.