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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