On May 18, 2016, the U.S. Department of Labor (DOL) announced its final rule on the minimum salary threshold that white-collar employees must be paid to qualify as exempt from the overtime (OT) requirements under the Fair Labor Standards Act (FLSA). The new salary level has now increased to $47,476 ($913 per week) from $23,660 ($455 per week) annually and takes effect December 1, 2016. This ruling left many employers with looming questions.
One of the unexpected changes to these new OT laws is a provision allowing certain bonuses, commissions, and incentive pay to count for up to 10% of the new increased minimum salary level. This new rule does clarify that only nondiscretionary bonuses, incentives, and commissions can be counted. However, this is problematic since the new rules fail to define the term “nondiscretionary”.
A Discretionary vs. Non Discretionary Bonus
There have been several opinions offered by various bloggers and articles on how to interpret a discretionary vs. a nondiscretionary bonus. One of the more popular positions taken is to reference other provisions of the FLSA. Other parts of the FLSA regulations do discuss bonuses; specifically which bonuses can be excluded from the regular rate used to calculate overtime for non-exempt employees because they are discretionary. A discretionary bonus under the FLSA is where the employer retains discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. A discretionary bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount. Once an employer promises in advance to pay a bonus at any point in time, the discretionary element no longer exists. Stated differently, a bonus is not discretionary if an employer either commits in advance to paying a bonus, or states the amount of the bonus or method of calculation in advance such as a previously announced bonus, performance, or incentive plan.
With no other guidance to rely on at this time, it would be prudent to assume the DOL will refer to these FLSA regulations as discussed above. Yet it is anyone’s guess how the courts will review this situation if ever presented with this fact scenario. Our court system has taken issues with positions asserted from all government agencies in the past. Thus, there is some uncertainty how any challenges to this would shake out unless or until the DOL published further guidance on these new OT rules.