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Don't Let Year-End Wage & Hour Issues Be a Lump of Coal In Your Stocking
December 7, 2010

Two year-end pay issues--one affecting exempt employees and the other non-exempt employees--can put you on the naughty list: the holiday shutdown and the non-discretionary year-end bonus. Both require careful attention so employees don't leave you with a lump of coal as you close out 2010.

Holiday Shutdowns

Since Christmas and New Year's Day both fall on Saturdays this year and many employees will be taking that week off, this is a likely year for businesses to implement a holiday shut down for a full work week. Any employer thinking about a company-mandated shutdown, whether for the holidays or any other reason, must be mindful of the requirements of the Fair Labor Standards Act (FLSA) and Oregon wage and hour laws. Failing to pay exempt employees during a company-mandated shutdown could, under certain circumstances, threaten the employees' exempt status and expose the company to penalties for wage and hour violations.

When does a company have to pay employees during a shutdown? The rule is easy for non-exempt employees. If they don't work, you don't have to pay them. It's more complicated, however, for exempt employees. An employer does not have to pay exempt employees for any workweek in which they perform no work. However, if an exempt employee performs any work in a workweek, the employer may not make deductions from the exempt employee's predetermined compensation (i.e., salary) for absences "occasioned by the employer or by the operating requirements of the business" when the employee is "ready, willing and able to work." Applying this to mandatory shutdowns, the rules are clear: If an employer shuts down for its full workweek and exempt employees perform no work, the employer does not have to pay them for the week. On the other hand, if an employer shuts down for only part of its workweek or an exempt employee performs any work during a full-week closure, the exempt employee must be paid for the full week despite the shutdown.

Remember that the workweek is defined by the employer and is not required to coincide with the calendar week. So, a Christmas to New Year's shutdown this year (Saturday to Saturday) might span an entire workweek for the employer whose workweek runs Saturday through Friday or Sunday through Saturday, but not Monday through Sunday unless the shutdown lasts through January 2nd. If the shutdown is for a full workweek, the business does not have to pay its exempt employees IF they do no work. Also, the employer can require employees to use their accrued paid time off to cover the week closure.

But what should an employer do if an exempt employee works during the full workweek shutdown, or the workweek does not coincide with the shutdown and the employee does not have sufficient paid time off to cover the shutdown days? In those situations, the employer must still pay that employee for the entire week even though the employee has no paid time off available. While the employer may require those employees to borrow against future time off, this has the potential to create problems later, for example, if the employee leaves prior to earning that already used time off. In the event an employee does not have any accrued time off to use, and an exempt employee performs ANY work during the shutdown, the employee must be paid for the entire week and need not substitute paid time off.

What kind of work are we talking about? Even something as routine as checking voicemail or email remotely or drafting or editing a memo might count.

So while a holiday shutdown might be economically advantageous in other respects, make sure that your workweek aligns with the holidays and instruct your exempt employees to leave their work (and their blackberries) at the office. And when in doubt, pay your exempt employees.

Non-Discretionary Year End Bonuses

Do you pay annual bonuses to your non-exempt employees? Did they work any overtime this year? If you answered yes to both of these questions, you may be open to a wage and hour claim if you do not include an overtime premium with the bonus.

First, the rule: If you pay non-exempt employees a non-discretionary bonus and they worked any overtime during the time period the bonus covers, you must also pay an additional overtime premium along with the bonus so that you retroactively adjust the employees' overtime compensation. That is so because the amount of the bonus must figure into the regular hourly wage on which overtime is calculated.

Non-discretionary bonuses generally include attendance bonuses, production bonuses, and retention bonuses. In short, if your employees have come to expect the bonus and can calculate the amount of the bonus before it is given, you are dealing with a non-discretionary bonus. On the other hand, a bonus may be discretionary (and exempt from the overtime adjustment) if it meets specific criteria: the employer retains discretion regarding whether to pay the bonus and how much to pay and the bonus payment is not made pursuant to any prior contract, agreement or promise.

Second, the why: The FLSA treats non-discretionary bonuses as additional compensation for an employee's work and any non-discretionary bonus (no matter when it is paid) must be calculated into the employee's regular rate for the time period the bonus covers. If it's an annual bonus, the employee's regular rate is recalculated for the entire year and then overtime pay, which is one and one-half times the regular hourly rate, must also be recalculated.

Here's an example: If a non-exempt employee who worked 2000 regular hours and 500 overtime hours is paid a $2500 year-end non-discretionary attendance bonus, that employee is entitled to an additional overtime payment of $250:

  • $2500 (the extra pay) divided by 2500 total hours = $1 more per hour earned during the year.
  • $1 divided by 2 = $0.50 (the amount of the overtime premium that has not yet been paid) multiplied by 500 overtime hours = $250.
  • So the total bonus would be $2750, including the overtime premium

So for any employers getting ready to deliver year-end non-discretionary bonuses, be sure to check those lists twice for employees who worked overtime and add in that overtime premium to avoid that lump of coal.

Happy holidays!

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