Lump Sum Pay Raises, Regular Rate, and the FLSA

Today’s FLSA Question: I am a firefighter in a small full-time unionized fire department. Our most recent three-year collective bargaining agreement provided us with “discretionary” lump-sum annual bonuses in lieu of traditional percentage-based wage increases. In the first year of the contract, we received a $2,000 lump sum payment. In the second and third year of the contract we will receive annual lump sum payments in the amount $2,250 and $2,500 respectively. The town is claiming since the pay increases are “discretionary” and in the form of a bonus, it does not need to be included in our regular rate or overtime rate. This doesn’t make sense to me. We are receiving these bonuses instead of pay raises. Any traditional pay raise would be added to my hourly rate and included in my overtime rate. Does the FLSA allow lump-sum annual bonuses be excluded from our regular rate of pay and overtime calculations?

Answer: The FLSA requires virtually all of the money an employee receives from their employer included in the employee’s regular rate of pay. While there are several narrow exceptions to this general rule, none apply to the lump-sum bonuses that you describe. Very often people mistakenly believe that by referring to wages and other forms of remuneration as a bonus, stipend, or an incentive negates any requirement to include it in the regular rate. Nothing could be further from the truth. Whether or not remuneration can be rightfully excluded from an employee’s regular rate requires a careful examination of the specific facts and circumstances and is not a result of the title given the bonus or the manner in which the bonus is paid.

Despite this, the town is correct in claiming that “discretionary” bonuses can be excluded from an employee’s regular rate of pay. However, in order for any bonus to be discretionary, the following requirements must be met. First, the employer must maintain discretion as to when the bonus will be paid and the amount of the bonus. Second, the bonus cannot be made as a result of any prior contract, agreement, or promise that causes employees to expect the bonus.

Here, I am assuming that the collective bargaining agreement contains some provision requiring the bonus be paid at or by a certain date. Additionally, the bonus amounts are clearly pre-determined within the employment agreement. Finally, by including the bonus within the collective bargaining agreement, the town has lost all discretion related to the bonus. Think of it this way. If the town fails to pay the bonus, do you and other firefighters have a legal right or recourse to receive the bonus? I would argue that you do. You could file a grievance and demand enforcement of the contract. The fact that the bonus is labelled as “discretionary” within the agreement has no bearing on whether the bonus can be excluded from the regular rate. The bonus is not “discretionary” as required by the FLSA and DOL regulations and therefore must be included in the firefighter’s regular rate.