United States: DOL Issues Opinion Letters Providing Guidance On Nondiscretionary Lump Sum Bonuses And Per-Project Payments

Executive Summary: The U.S. Department of Labor (DOL) issued two Fair Labor Standards Act (FLSA) opinion letters on January 7, 2020, addressing questions regarding overtime calculation for nondiscretionary lump sum bonuses and per-project payments under the salary basis test. In the first opinion letter, the DOL ultimately stated that the appropriate method for calculating overtime pay on nondiscretionary lump sum bonus earnings that cannot be identified with particular workweeks is allocating the bonus equally to each workweek. In the second opinion letter, the DOL concluded that a “per-project” payment may satisfy the salary basis test, even in situations where the employee is earning “extra compensation” working on additional projects.

Analysis:

Opinion letter FLSA2020-1 addresses the issue of calculating overtime pay for a nondiscretionary lump sum bonus offered to employees, where earnings cannot be identified with particular workweeks. As a preliminary matter, the DOL stated that nondiscretionary lump sum bonuses, including “stay bonuses” which encourage employees to remain with the company, must be included in the employees’ regular rate of pay. Further, the DOL opined that the appropriate method for computing overtime pay on bonus earnings that cannot be identified with particular workweeks is allocating bonuses equally to each week of the “bonus period.” However, employees must first satisfy the criteria for receiving the lump sum bonus. For example, in the scenario presented, employees receive a nondiscretionary lump sum bonus of $3,000 for successfully completing a 10-week training period and agreeing to continue training for another eight weeks. The employees retain the bonus regardless of actually completing the additional eight weeks. However, missing any workweek bonus period could disqualify the employee from receiving the bonus altogether. Assuming the employee completed the 10-week training period, the DOL allocated $300 in bonus per workweek, which the employer would be required to include in employee’s regular rate of pay when calculating overtime.

Opinion letter FLSA2020-2 responds to a request concerning “per-project” payments in “equal pre-determined” biweekly or monthly installments to educational consultants. In the example provided to the DOL, a consultant is assigned to work on a project for a 40-week academic year. The project involves developing a new curriculum and the hours can range from zero to eighty per week. The consultant will be paid $80,000 for the project in bi-weekly payments of $4,000. While working on this project, the consultant is assigned to another project, which will last eight weeks and involves designing and conducting five teacher workshops. The consultant will be paid $6,000 in bi-weekly installments of $1,500 for the second project. Thus, there will be four bi-weekly periods during which the projects overlap and the consultant will be paid $5,500 bi-weekly. The amount of total compensation also may change several times throughout the year depending on which assignments the consultant is assigned to, and the per-project amount may be revised if changes are made to the scope of a particular project. The request seeks guidance on whether these payments constitute payments on a fee basis or salary basis under the FLSA.

For purposes of the opinion, the DOL assumed the educational consultants meet the duties tests of the administrative or professional exemptions. The DOL concluded that payment of $80,000 on a bi-weekly basis for work on developing a new curriculum satisfies the salary basis requirement. The amounts of the payments do not vary from week to week or month to month based on the number of hours actually worked, and the DOL presumed the payments also do not vary based on the quality of work performed. The DOL further noted that the second eight-week assignment (which the consultant performs while continuing to work on the first project) satisfies the regulation’s requirements as extra compensation. 29 C.F.R. § 541.604(a). The DOL stated that the consultant is already paid on a bona fide salary basis for the 40-week project, and additional compensation for the eight-week project is pay for additional work beyond the normal workweek. The DOL concluded that the additional payment for the second project “may be made without changing the employee’s exempt status.”

Similarly, the DOL stated that changes to total compensation per week because of the number of projects to which a consultant is during the year does not change the employee’s exempt status, provided that the employee still satisfies the salary basis and extra compensation requirements. However, the DOL cautioned that the employee’s exempt status may be undermined if there are frequent revisions to the contract, i.e., changes to the consultant’s per-project pay, so that the amount of the employee’s bi-weekly compensation is “rarely the same from pay period to pay period and the circumstances suggest the amount of payment is … actually based on the quantity or quality of work performed.”

Employers’ Bottom Line:

Employers should review their wage and hour procedures to ensure compliance with this new guidance, especially when issuing nondiscretionary lump sum bonuses and utilizing “per-project” compensation structures. It is equally important to review the facts involved in the opinion letters before acting in conformity with the guidance, as each opinion letter is fact- sensitive and individualized.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.