How to Manage Risk in a Sizzling Summer Labor Market

Miles & Stockbridge P.C.
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After more than a year of widespread unemployment, 2021 summer travelers saw establishments of all kinds advertising employment openings. With the expiration of pandemic-related federal and state unemployment benefits, many workers are returning to work. On July 2, the Bureau of Labor Statistics reported that employment is up. The jobs report tells us that the U.S. added 850,000 jobs in June, the largest increase in 10 months, though unemployment remains higher than normal at 5.9%. With pandemic restrictions mostly gone and vaccination rates rising, U.S. employers are enthusiastically resuming and expanding operations, but they are doing so at a heightened cost.

Nearly one out of four new jobs was in the leisure and hospitality industry that is eager to bounce back after being crushed in the pandemic. This same industry relies on foreign student workers to power seaside towns over the summer. Foreign students who come to the U.S. to work may be still subject to travel restrictions to the U.S. due to challenges in raising international vaccination rates.

To fill job openings, employers are offering higher wages and bonuses to hourly workers. A billboard in Delaware along Interstate 95 North advertised hourly wages over $16 an hour at a food producer, and a convenience store in New Jersey offered a $500 new hire bonus. Indeed, hourly wages are up 3.6% from where they were in June 2020, and at restaurants and bars they are up 7.9% from their pre-pandemic level. In addition to higher wages, many employers have offered pandemic bonuses in an attempt to attract and retain employees.

Employers should be aware, however, that bonuses to non-exempt hourly workers can complicate overtime pay calculations and create risk for employers if done incorrectly. The Fair Labor Standards Act (“FLSA”) requires employers to pay non-exempt workers for all hours worked over 40 in a workweek at a rate of 1.5x their regular rate of pay. The regular rate of pay includes all compensation paid to employees, including bonuses that are announced in advance; paid pursuant to a promise, contract, or agreement; or are designed to influence performance. This means that hiring bonuses offered in conjunction with a “help wanted” advertisement must be included in the calculation of overtime pay.

To incorporate bonuses into an employee’s hourly rate, employers must first determine the applicable time period that the bonus covers and add the bonus to the employer’s normal hourly compensation for that time period. Any applicable overtime for the time period is calculated based on that total. A simple example is an employee who works 50 hours in a week at $20 per hour, and earns a $100 nondiscretionary bonus based on meeting goals for that week. The employee’s compensation for the week (before owed overtime) is $20 x 50 = $1,000 + $100 = $1,100. The employee’s regular rate of pay for the week is $1,100 ÷ 50 = $22, and they are due an overtime premium of $22 x 0.5 for the 10 hours of overtime, or an additional $110. See the Department of Labor’s fact sheet for additional examples. While a $10 difference may not seem like much if an employer failed to consider the $100 bonus when calculating overtime, damages can add up when this is done improperly for an entire workforce over time. Failure to include bonuses in overtime calculations has led to costly collective actions that may also involve attorneys’ fees and treble damages under state law.

Three important considerations emerge for employers:

  1. Hiring bonuses for non-exempt employees, if promised or advertised during recruitment, may need to be considered in an employee's base rate of pay for overtime calculations.
  2. Depending on whether the bonus you are offering is discretionary or nondiscretionary, or announced well in advance, it may need to be incorporated into the hourly overtime rate for non-exempt workers.
  3. Increased wages may be common now, but may not be sustainable long term.

When implementing a new policy or practice, employers are wise to do an across-the-board check for policies that have become outdated or are inconsistent with current practice.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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