Today’s FLSA Question: I am a full-time firefighter for a small city fire department. Our state does not recognize collective bargaining for public employees and we are not represented by a union. Firefighter pay in our city lags behind most of our neighboring departments. As a result, recruitment and retention is a huge issue. The city recently looked to address this problem by announcing a new pay plan for fiscal year 22/23. In addition to providing an across-the-board pay increase for all employees, the city is also providing a series of bonuses that are payable in our bi-weekly pay checks. The bonuses range between $1,000 and $2,400 per year depending on the employee’s years of service. Finally, the city is also providing a medic stipend of $1,500 per year. That stipend is payable at the end of the fiscal year. In order to receive that bonus, the medic must stay employed by the city for the entire year. The city is not including any of the bonuses when calculating our regular rate. According to the chief, the folks at city hall are saying the bonuses are discretionary and do not need to be included in the regular rate. Personally, I have been with the department more than twenty years. I appreciate the raises and bonuses; however, I am concerned that we will find ourselves involved in an FLSA lawsuit as a result of the city’s failure to include these bonuses in the regular rate and it will reflect poorly on our department. I just want the city to do what is right. Should I be concerned?
Answer: I have received three questions, very similar to this one over the past couple of months. I sense a trend here. Many public employers, like your city are struggling to find ways to recruit and retain employees in today’s job market. I think that many cities are trying to increase compensation for current and new employees while minimizing the impact on the ever-increasing and often scrutinized overtime budget. As many of us are aware, even the best-intentioned city leaders cannot always comprehend what drives firefighter overtime.
The FLSA and Department of Labor (DOL) regulations require that all remuneration paid to an employee by his or her employer be included in the employee’s regular rate of pay. As a general rule, this includes longevity pay and bonuses for medic or other certifications. Failure to include all remuneration in an employee’s regular rate results in under-paying that employee’s overtime pay. However, there are several limited exceptions to this general rule. Included in this list of exceptions are bonuses that are provided to employees at the sole discretion of the employer. You can find this exception at 29 USC §207(e)(3)(a):
Sums  paid in recognition of services performed during a given period if either, (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly…
This provision allows employers exclude certain bonuses from an employee’s regular rate provided the requirements of the exception are satisfied. In my opinion it is difficult for public employers, like your city, to meet the discretionary bonus exception when the purpose of the bonus is employee recruitment and retention. Here are a couple of examples to help clarify further:
Example 1: City X finishes the year with a budget surplus and opts to provide all firefighters with a $1,000 bonus at the end of the fiscal year. The city did not promise this bonus prior to the end of the year. Fire department employees were not informed of the amount or time of payment of the bonus prior to the beginning of the year.
Example 2: City X has a recruitment and retention problem at its fire department partially due to poor pay. The city comes up with a pay plan that promises bonuses at several times over the course of the current fiscal year and others that are promised at the end of the fiscal year (provided that the firefighter still works for the city at that time). The city clearly states the bonuses are for this fiscal year only and as such are discretionary, and not included in the firefighter’s regular rate.
The facts provided in “Example 1” clearly describe a discretionary bonus. First, the firefighters were not promised the bonus ahead of time and second, the employer waited until the end of the year to make such a payment. This assumes that the authority that can authorize such a payment (city council, mayor, board of selectmen, etc.) does so consistent with the FLSA and DOL regulations pertaining to discretionary bonuses.
However, “Example 2” is not nearly as clear-cut as the first example. First, the bonuses in this example are promised to the firefighters in advance. The FLSA doesn’t allow a bonus to be both promised and discretionary at the same time. Second, DOL regulations require any bonus that is “announced to employees to induce them to … remain with the firm” must be included in the regular rate of pay. For more on retention bonuses, click here.
I think that your concerns over whether the bonuses can be excluded from the firefighters’ regular rate are reasonable. I would also be concerned that a well-intentioned bonus plan-like this one-could result in future unnecessary litigation. I would strongly urge your city leaders to consult with legal counsel and determine whether the specific language contained in your new pay plan truly aligns with the FLSA’s discretionary bonus exception.
Do you have questions related to medic stipends, retention bonuses, and the regular rate? If yes, please consider enrolling in the next FLSA for Fire Departments live webinar. For more information, click here.