Are Referral Bonuses Included in Overtime Calculations?

Referral bonuses generally aren't included in the regular rate of pay and so aren't included in overtime calculations, according to a recent Department of Labor (DOL) opinion letter. But some portions of a referral bonus could be included if the employee has a contractual right to the payment.

The regular rate of pay is used to calculate overtime premiums under the Fair Labor Standards Act (FLSA). The regular rate includes hourly wages and salaries for nonexempt workers, most bonuses, shift differentials, on-call pay and commissions. It excludes health insurance, paid leave, holiday and other discretionary bonuses, and certain gifts.

"A pure recruiting bonus given to production workers is not at all tied to the productivity of the worker, so the exclusion of the bonus from the regular rate is not at all surprising," said Gerald Hathaway, an attorney with Faegre Drinker in New York City.

Paul DeCamp, an attorney with Epstein Becker Green in Washington, D.C., explained, "It does not serve the underlying purposes of the statutory overtime requirement—encouraging employers to spread work around in order to alleviate unemployment and to reduce the harms of excessive labor—to require an employer to pay a premium on top of a referral bonus." He noted that to be excludable, the referral bonus should not depend on the quality or quantity of the employee's work.

Referral-Bonus Opinion Letter

In the referral-bonus opinion letter, the DOL addressed the questions presented by an employer that was considering a referral bonus payable in two equal installments.

The amount being considered for the referral bonus was described as "significant." The first installment would be paid when the employer hires the referred employee. The second installment would be paid on the one-year employment anniversary of the hired employee if he or she and the referrer still are employed. The second installment would essentially be a longevity bonus, the DOL said.

Only employees not in HR and without any responsibilities associated with employee recruitment, hiring, selection or the final decision on whether the referred job applicant is hired would be eligible for the bonus. Participation in the referral program would be voluntary, would not require significant time beyond submitting the name of a potential recruit and would be limited to after-hours social conversations.

The FLSA requires payment at a rate not less than 1 1/2 times the regular rate of pay to nonexempt employees for all hours worked in excess of 40 in a workweek.

The first installment of the referral bonus would not be included in the regular rate, as the employees participating in the referral program were not hired to recruit new workers. Moreover, the conditions suggested by the employer align with the 2019 regular rate final rule, the DOL said.

The second installment might be excludable as a gift. To qualify for the exclusion, the bonus must meet the following conditions:

• Not measured by hours worked, production or efficiency.
• Not paid due to a contract.

The first condition was met by the terms described by the employer, but it was unclear whether the second was, the DOL stated in the opinion letter.

Andrew Scroggins, an attorney with Seyfarth in Chicago, cautioned that if the bonus payment is not enforceable by contract, employees may feel less incentive to make referrals. "Employers will want to check their policies to strike the right balance between motivating employees to make referrals, encouraging the employee and new referral to stay, and avoid having any referral bonus added to the regular rate," he said.

One option would be to spread a second installment over each pay period of the year, which would make the impact on the employee's regular rate and overtime modest if there was a contractual right to that longevity payment, said Joseph Mulherin, an attorney with McDermott Will & Emery in Chicago.

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

Other Opinion Letters

In another recent opinion letter, the DOL clarified that group life insurance premiums paid by an employer on an employee's behalf can be excluded from the regular rate, as long as certain insurance requirements are met. This is true even if the life insurance benefit exceeds $50,000, which triggers the Internal Revenue Code requirement to include such premiums in gross taxable income, noted James Coleman, an attorney with Constangy, Brooks, Smith & Prophete in Fairfax, Va.

An additional new opinion letter addresses a longevity bonus paid by an Alabama city government at Christmas to its long-term employees. A city resolution required the longevity award, and so the payment was not an excludable gift, the DOL said. If the city resolution merely authorized the award and made it discretionary, the payment would be excludable from the regular rate.

Provide input as the DOL develops further guidance on the FFCRA. Participate online at https://ffcra.ideascale.com through April 10—an extended deadline.