One of the potential landmines with pay for performance is to make sure you are compliant with state and federal overtime laws. By law, if an employee works overtime and receives bonus pay during that period of work that they had overtime, their bonuses must be upward adjusted by the proportionate amount for overtime.
Here is an example.
- Employee Hours: 53 hours (40 hrs reg and 13 hrs OT)
- Employee Hourly Wage: $15/hr
- Unadjusted Base Pay: $795
- Bonus Earned: $1/hr
- Unadjusted Bonus: $53
- Overtime Rate: 50%
To calculate the adjusted bonus, you will need to adjust the bonus pay for each our worked overtime. Since the employee had 13 hours of overtime, their bonus on those overtime hours needs to be upwardly revised by the overtime hours. The employee would earn then 50% x $1/hr x 13 hours = $6.50 additional bonus.
Adjusted Pay:
- Overtime Pay Adjustment: 50% x $15/hr x 13 = $97.50
- Overtime Bonus Adjustment: 50% x $1/hr x 13 = $6.50
- Total OT Adjustment: $97.50 + $6.50 = $104.00
Gross Pay:
- Regular Pay: $795.00
- Bonus Pay: $ 53.00
- OT Adjustment: $104.00
- Total Gross Pay: $952.00
The OT adjustments must be applied to any bonus earned during that pay period for non-exempt workers. You also have to pay special consideration to state laws as well. For example, in California, if you work more hours than your defined shift in a day, those hours are OT even if you only work 30 hours that week.
The OT adjustment is applied to the pay period and not the day. As an example, if you earned a bonus on Monday of $2/hr and worked 8 hours but no bonus for any other days worked and worked a total of 44 hours that week, you would need to upwardly adjust the gross $16 bonus upward by the 4 hours of Overtime.
To do this, you calculate your average hourly bonus. In this case $16 / 44 hours worked = $0.364 per hour. The upward adjustment would be 4 hours OT * 50% * $0.36 = $0.72 total. Gross total bonus is then $16 + $0.72 = $16.72.
It is very important that you incorporate overtime adjustments into your bonus calculations to avoid potential liabilities from both your employees, unions and state and federal regulators. Easy Metrics pay for performance system pre calculates all of these adjustments for you based on your respective locations overtime rules.
