For decades, federal wage and hour regulations have required that non-discretionary bonuses paid to employees be included in the recipients’ “regular rate” for purposes of calculating their overtime premiums.  In other words, if an employee earns a base rate of $10/hour and also earns a non-discretionary weekly productivity bonus in the amount of $50 during a week in which he works 50 hours, his regular rate for the week will jump to $11/hour.  For the ten overtime hours he worked during the week, his ½ time overtime premium must be calculated based on the inflated regular rate, not his lower base rate.  So, his total earnings in the example above would equate to [50 hours x $10/hour = $500] + [10 x ½ x $11.00] = $555.00.

Many employers overlook this basic requirement in the U.S. Department of Labor’s (“DOL”) regulations governing overtime compensation – and the law on this issue just got a little bit trickier.  In Secretary of Labor v. Bristol Excavating, Inc., Talisman Energy Inc. offered a variety of bonuses to all workers at its drilling sites, including employees of its contractors.  Employees of Bristol Excavating, a contractor on a Talisman job site, inquired with their employer whether they could qualify for the Talisman bonuses.  Bristol, in turn, posed this question to Talisman, and Talisman agreed to extend their bonus programs to Bristol’s employees – including bonuses for safety, efficiency and a “Pacesetter” bonus.  Bristol and Talisman did not enter a formal agreement regarding this arrangement, but Bristol did undertake the clerical work to administer the bonus programs as they applied to its employees (e.g. determining eligibility, invoicing Talisman and distributing Talisman’s bonus payments).

During a routine compliance audit, a DOL auditor determined that the Talisman bonuses paid to Bristol’s employees must be added to each recipient’s regular rate of pay for purposes of calculating his or her overtime premiums.  Bristol disagreed, and the matter proceeded to federal court.

The U.S. Court of Appeals for the Third Circuit rejected the DOL’s position that all payments to employees for their services, regardless of their source, must be included in the regular rate of pay unless specifically exempted.  Instead, the Third Circuit reasoned that whether a payment qualifies as remuneration for employment “depends on the employer’s and employee’s agreement.”  The Court identified a number of factors to be considered in determining whether third-party bonuses should be considered remuneration for employment, including: (a) whether the specific requirements for receiving the payments are known by the employees in advance of performing the work; (b) whether the payment itself is for a reasonably specific amount; and (c) whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle.  If those factors exist, a court should then consider whether the employer and its employees “have adopted the third-party incentive bonuses as part of their employment agreement.”

In applying this analysis to the Talisman payments, the Third Circuit concluded that the $25 daily safety bonuses paid by Talisman to Bristol’s employees were, in fact, remuneration for employment since “Bristol’s facilitation of the program went significantly beyond merely acting as a pass-through.”  On the other hand, the Court found that the evidence of record was insufficient to conclude that Talisman’s Pacesetter and efficiency bonuses were remuneration subject to the DOL’s overtime rules.  For this reason, the Third Circuit remanded the case for further proceedings on this issue.

Although the Bristol Excavating decision was not a complete victory for the DOL, it does highlight a basic point that many employers are likely to overlook: bonuses and other payments made by third parties to your employees may affect how you must calculate their overtime premiums.  If your employees may receive payments from third parties for their services, it is important to determine whether those payments should be included in their regular rate for overtime purposes.