Performance-based commissions and bonuses are an effective way to incentivize employee performance. They can help your practice achieve new sales goals, boost efficiency and increase your team’s morale and engagement. But be aware: If your nonexempt employees—those being paid on an hourly vs. salary basis—reach the goals you’ve set, this extra pay must be factored into overtime pay. This is because outcome-based bonuses—those related to production, sales, or other measurable goal or incentives—are considered wages.
The Fair Labor Standards Act (FLSA) dictates the requirements of overtime compensation. If your business earns $500,000 or more in gross annual receipts or takes part in interstate commerce—which has been broadly defined as regularly using the U.S. mail to send or receive letters to and from other states, or using company telephones or computers to place or accept interstate business calls or take orders—then these rules apply to you. This means that your clinic, practice or medspa is required to comply with a set of FLSA regulations covering topics like minimum wage, child labor and overtime pay.
The current 40-hour work week for nonexempt employees was introduced by the FLSA, as were the rules that stipulate the “extra pay” overtime rate when that 40-hour work week is exceeded. Some states, like California, have even stricter rules that require overtime when more than eight hours are worked in a day or under certain other conditions.
There is a common myth that if an employee exceeds 40 hours of work in one week, then he or she must be paid 1½ times their hourly rate for the hours past 40. But the time-and-a-half rule is not this simple. Per the FLSA, an employee’s overtime rate of pay is calculated as 1½ times their regular rate of pay, not their hourly rate of pay.
This is where even veteran employers often get a bit confused. An employee’s hourly rate is just that—the per-hour wage you’ve mutually agreed upon. But their regular rate of pay is their total compensation received divided by their total hours worked within the work week.
So, while an employee’s regular rate of pay would never be lower than their hourly rate, it could easily be higher during any week in which they earned any type of additional commission or bonus based on sales, production, efficiency, new patients or other employer-provided incentive. Some bonuses are specifically exempted under the FLSA. We’ll get to that in a moment.
But first, to calculate overtime pay properly, we first need to calculate an employee’s regular rate. Once you have that, then you multiply that rate by 1½. Here is the formula:
Regular Rate of Pay = Total Weekly Pay (Wages + Bonus) ÷ Total Hours Worked
Overtime Rate of Pay = Regular Rate of Pay x 1.5 For example: Say your clinic employs a licensed medical esthetician named Sandra. Sandra earns $17/hr. Last week she worked 42 hours and earned a production bonus of $150. Here’s how her total compensation would be calculated:
Total Weekly Pay: (42 hrs x $17) + $150 = $864
Regular Rate of Pay: $864 ÷ 42 hrs = $20.57
Overtime Rate of Pay: $20.57 x 1.5 = $30.86
Total Compensation Due: $680 [40 hrs x Sandra’s hourly rate of $17] + $61.72 [2 hrs x Sandra’s OT rate] + $150 [bonus] = $891.72
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Identifying Exempt Bonuses
There is one other kind of bonus that does not need to be factored into the regular rate of pay. Discretionary bonuses, such as holiday bonuses, gifts and certain expense reimbursements, are all exempted under the FLSA. This means that if you do it correctly—meaning employees know that the bonus in question is not an outcome-based reward and you are not obligated to pay it out—then these discretionary bonuses do not need to be included in your calculation of the regular rate of pay for overtime purposes.
So if you like to give the odd holiday bonus out to your employees you may be OK, depending on whether the policy you have in place makes the discretionary nature of that bonus clear enough. Keep in mind, you cannot make an outcome-based bonus discretionary simply by calling it something else. In the event of any Department of Labor audit, the first things they ask for are time cards and details of any bonus/commission systems.
In order to avoid the complications and extra expense of overtime pay, it is fine to tell employees that prior authorization must be obtained before working overtime, and you would be within your rights to discipline them if they don’t follow that policy. This is true whether or not you ever pay commissions or bonuses out to your team. However, hiccups are inevitable—sometimes a bit of overtime is accidental, simply unavoidable or even temporarily necessary for a particular project. And if overtime is worked, even just a few minutes, it must be paid correctly.
Ultimately, preventing and resolving employee disputes regarding overtime pay and bonus systems relies a great deal on the policies in your employee handbook. For outcome-based bonuses, your policies should detail exactly what is required of employees in order to be eligible and to qualify. If you don’t want to provide a quarterly incentive bonus earned last month to an employee who was just hired yesterday, or to one who was on leave for the entirety of that quarter, your policy must include this information.
If your written policies are vague, misleading, inconsistent or unenforceable, you’re much more likely to find yourself facing escalated disputes or even a formal complaint. To help avert this fate—and give your practice far better chances if any dispute does occur—your bonus and commission policies should be written and reviewed by an expert.
Paul Edwards is the CEO and co-founder of CEDR HR Solutions, a provider of individually customized employee handbooks and HR services for healthcare employers of all specialties. He is an HR expert with 25 years of management experience and the author of the blog HR Base Camp. Contact him at 602.476.1418, email@example.com.
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