Holding On, Loosely: Incentives for Employee Retention

Let’s talk about problems with retention bonuses and overtime—as if finding qualified workers wasn’t tough enough.

According to the most recent report from the Bureau of Labor Statistics, nonfarm employment rose by 428,000 in April 2022. However, some sectors are still struggling and “now hiring” or “help wanted” signs are everywhere.

As a result, many employers have resorted to offering financial incentives, including “sign-on” or “retention” bonuses to encourage people to sign up and to stick around.

As we’ve discussed previously, these types of bonuses have to be included in any overtime compensation due. This is because of the so-called “regular rate” calculation required by the Fair Labor Standards Act (FLSA). Under the FLSA, all forms of remuneration paid to an employee for work performed must be included in the regular rate calculation to determine the proper overtime premium. There are a few exceptions to this rule, but generally speaking, sign-on bonuses and retention bonuses don’t fit into any of those exceptions.

So, what does this mean? This means that in any workweek in which an employee works overtime, the employee’s “regular rate” needs to include these variable forms of compensation. And one might ask, “Isn’t the sign-on bonus really not for work—it’s just to accept the offer of employment?” Okay, in that case, the Department of Labor would agree with you. But, how often do employers just hand out no-strings-attached freebies when an employee signs their offer letter? In reality, sign-on bonuses are typically subject to a policy that requires the employee to work a minimum number of weeks or months before they are paid the bonus or, the bonus is subject to a “clawback” provision that requires the employee to pay the sign-on bonus back if they leave early. This means the bonus is tied to hours worked, production, efficiency, or the quality or quantity of work performed. Therefore, it needs to be included.

Now, let’s go over the calculation to make sure that everybody’s clear on how this needs to be done.

Example: Six-Month Retention Bonus

In an effort to attract more personnel, an employer offers hourly non-exempt employees a $2,000 bonus after being employed six months.

The retention bonus must be included in the regular rate calculation for the workweeks that the employees worked overtime during the bonus period.

As the retention bonus was earned over six months (26 weeks), this is an increase of $76.92 per week ($2,000 ÷ 26 weeks). If an employee worked overtime during the 26-week period, the increase in the regular rate is calculated by dividing $76.92 by the total hours worked during each of the weeks that the employee worked overtime.

The $76.92 would be divided by the total hours worked (both straight time and overtime) to determine the increase in the regular rate for that workweek. Then, that amount would be divided by two to get the increase in the overtime premium.

That “half-time” would be multiplied by the overtime hours for that workweek and then added to the bonus. For this example, let’s use a workweek with 50 hours total.

$76.92 ÷ 50 hours = $1.54 increase in the regular rate for that week

$1.54 ÷ 2 = $0.77 increase for the “half-time” premium

$0.77 x 10 hours of overtime that week = $7.70 increase in overtime as a result of the bonus.

The employer would make this calculation for every workweek with overtime and then add the additional premiums to the bonus. That’s a lot of math. Most third-party payroll providers should be able to make this calculation (maybe for an extra charge) and most payroll departments can easily create a spreadsheet that automatically calculates the regular rate and overtime premium correctly.

The Department of Labor also says that if there are facts that make it inappropriate to assume equal bonus earnings for each workweek, it may be reasonable and equitable to assume that the employee earned an equal amount of bonus each hour of the [bonus] period and the resultant hourly increase may be determined by dividing the total bonus by the number of hours worked by the employee during the period for which it is paid.

That’s a little more advanced, but it may be easier to calculate, if that makes sense.

Also, the bonus may provide for the payment of a flat percentage of all straight time and overtime earnings. The Department of Labor says these plans are also okay, as in such instances, the payments will raise both the regular rate and overtime premium at the same time and no recalculation of the regular rate will be required.

And as an even more creative option, an employer can offer a raffle prize. In order to be eligible to enter the raffle, the employee must meet the retention goal. In one instance, the prize was a $25,000 ATV. So, will the value of the prize have to be included in the regular rate? At first blush, the Department of Labor says that prizes are included in the regular rate if they are paid to an employee as remuneration for employment.

However, in 1996, the Department of Labor issued an Opinion Letter wherein it said that large prizes that are offered pursuant to a lottery are not remuneration for employment. The only thing the employee is actually earning is a chance to participate in the lottery. Therefore, the employer would not have to include the value of the prize in the winner’s regular rate. But if you give away an ATV, maybe it would be wise to have the winner sign a liability waiver…

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