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FLSA Rules for Incentive Pay

written by: Vikas Vij•edited by: Ginny Edwards•updated: 12/2/2010

Whether you are an employer or an employee, understanding the basics of FLSA incentive pay rules is in your own interest. It ensures fair compensation for the employee and a lawful wage computation on part of the employer.

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    FLSA Incentive Wage Law

    FLSA Incentive Wage Rate It is common for a business organization to give monetary incentives to their employees as a recognition or reward for their work performance. However, the employer must be careful about the FLSA incentive pay rules when computing the effective regular pay rate of each employee. Some monetary incentives may have to be included as a part of the regular wage rate, while some other incentives may be exempted from such inclusion. So at the time of computation of the wage rate for overtime compensation, the employer will have the accurate figures available.

    Computation of Regular Wage Rate

    Employees may receive monetary incentives that augment their basic wage, which may include items such as performance bonuses, reward for full attendance, reward for long-standing employment and compensation for working in odd conditions or shift differential payments. The FLSA incentive pay rules follow a simple principle that any money that an employee receives from the organization as “compensation for work" must get included in the regular wage rate of the employee. Since these monetary incentives are received intermittently, their computation in the regular wage rate is done on a pro rata basis. This can be a slightly complicated administrative procedure, but the FLSA rules are strict with regard to such computations, and the organization must abide by them diligently.

    Inclusion of Non-discretionary Bonuses

    As per the FLSA rules, all such bonuses and rewards that are non-discretionary in nature, must be included when calculating the employee’s regular wage rate. If the employer has a pre-determined sales incentive policy already in place that states that on meeting a certain sales target, the employee will be entitled to a cash reward or sharing in the profit, it will be viewed as a non-discretionary bonus. So this reward will be included while computing the employee’s regular wage rate. However, if the employer rewards an employee out of his own discretion, which is not mandated as per the company policies, it will be treated as a discretionary bonus and need not be included in the calculation of regular wages. The FLSA criterion for such bonuses is that they must not be frequent and not expected as a tradition in the company. The discretionary bonus must not be announced till the very end or near the end of the period for which it is being awarded.

    Exclusion of Bonuses Not Related to Work

    Any payment to an employee that is meant to reimburse him for his out-of-pocket expenses will not be included as a part of the regular wage because it is not a “compensation for work." Some companies award an educational stipend to employees who have earned a specific educational qualification or training. Alternatively, some employers provide tuition money to their employees to acquire a specific qualification. In these cases, the “stipend" may be construed as a “compensation for work" but “tuition money" may be seen as a reimbursement of expenses, and not as compensation. If the employees wear uniform to work, the cost of dry cleaning and maintenance may not be included as a part of the regular pay. Therefore, any compensation that is not work-related will be exempt from inclusion in the computation of regular pay rates.

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