On May 18, 2016, the Department of Labor (DoL) published their new overtime exemption Final Rule—the most significant update to the nation’s overtime laws in more than 40 years.

The new rule not only increases the minimum salary (or “standard salary level”) that must be paid to overtime-exempt workers, but changes how bonuses and incentive payments given to employees count towards fulfilling the standard salary level.

The Changes

Under current regulations, non-discretionary bonuses and commissions cannot be counted towards the standard salary level.

Under the new Final Rule, which takes effect December 1, 2016, employers will be able to use non-discretionary bonuses and incentive payments (including commissions) to fulfill up to 10% of the standard salary level, provided they are paid at least quarterly.

What Are Nondiscretionary Bonuses Vs. Discretionary Bonuses?

Non-discretionary bonuses and incentive payments are forms or compensation promised to employees in order to induce them to perform more effectively or remain with the company.

Examples include:

  • Commissions based on a fixed formula
  • Retention bonuses
  • Bonuses for meeting set production goals (e.g. a bonus based on a specified percentage of business profits in a quarter)

Discretionary bonuses, on the other hand, are not tied to any preannounced standards. The decision to award the bonus, and the amount of the payment, is at the employer’s sole discretion.

Examples include:

  • A “surprise bonus” given to employees
  • A spontaneous monetary reward given to an employee for a specific act

Discretionary bonuses cannot be counted towards the standard salary level.

Catch-Up Payments

In the event that an employee doesn’t earn enough in non-discretionary bonuses and incentive payments in a given quarter to meet the standard salary requirement (and so remain exempt), the DoL permits a “catch-up” payment at the end of the quarter.

The employer has one pay period to make up the shortfall (up to 10% of the standard salary level for the preceding 13 week period). The catch-up payment counts only towards the prior quarter’s salary amount, and not towards the salary amount in the quarter in which it was paid.

If the employer chooses not to make up the shortfall with a catch-up payment, the employee is then entitled to overtime pay for any overtime hours worked during the quarter.