Nondiscretionary Incentive Payments Under the New FLSA Overtime Rule

With all of the good news surrounding the new FLSA overtime rule, it should not be a surprise that there may be one or two "catches" to the new policies. The provision regarding "nondiscretionary incentive payments" is an example that may be considered a benefit for employers. According to the new rule, employers are allowed to apply "nondiscretionary incentive payments" to meet up to 10 percent of the new salary threshold. Here is what employees need to know, especially if you are paid on commission or some other form of incentive-based compensation.

What does the Final Rule say?

The Final Rule allows nondiscretionary incentive bonuses, which are tied to productivity or profitability, to be counted towards up to 10 percent of the salary threshold for white collar positions. That equates to $1,186.90 per quarter. This would include for example, a bonus based on a set percentage of the profits generated by a business in a certain time period. In order to do this, these payments must be paid at least on a quarterly basis. The Final Rule also allows an employer to make so-called "catch-up" payments in order to maintain the exemption if an employee does not receive enough in nondiscretionary bonuses and incentive payments in a given quarter to remain exempt.

When can these payments apply?

What the Final Rule does not allow is for employers to use nondiscretionary incentive payments towards meeting the weekly salary threshold for highly compensated employees, which are those who are exempt because they make at least $134,004 annually. However, employers can still count bonuses, commissions, and other nondiscretionary compensation paid at least annually when it comes to the yearly HCE threshold.

How is "Nondiscretionary" defined?

Under the Final Rule, nondiscretionary incentive payments are forms of compensation promised to employees to induce them to work more efficiently or to remain with the company. Some examples include:

  • commission payments based on a fixed formula
  • bonuses for meeting set production goals
  • retention bonuses

Discretionary bonuses, on the other hand, are those for which the decision to award the bonus and the amount of the bonus is at the employer's sole discretion, as opposed to in accordance with any preannounced formula or standard.

Not all nondiscretionary bonus plans are created equally

While the standard for recognizing nondiscretionary incentive payments may seem fairly straightforward, there are some plans that may necessitate further examination. Take, for example, a purported nondiscretionary bonus plan that pays monthly production bonuses for employees in "good standing." The trouble comes in where the determination of whether an employee is in good standing is made by a supervisor, in that supervisor's sole discretion.

The simple language "good standing" could move a seeming nondiscretionary plan out of the realm of nondiscretionary incentive payments described in the Final Rule. If that is the case, the bonus cannot be applied to the salary threshold. The same is true for bonus plan that include performance milestones of some kind, if those milestones cannot be achieved objectively.

As the real contours of the Final Rule are being fleshed out, this is an area of employment law that will be closely watched. If you feel you have been the denied overtime pay to which you believe you were entitled, or if you have any questions regarding your employment rights, please contact Wrady & Michel, LLC, either online or by calling us at (205) 265-1880.

Categories: Employment Law, Overtime
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