The U.S. Department of Labor’s (DOL) final rule on defining and delimiting the exemptions for executive, administrative, professional, outside sales and computer employees (EAP employees) became effective Jan. 1, 2020. Among other things, the final rule updated the standard salary level employees must satisfy to qualify for an overtime exemption.
The final rule also allows employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level if these payments are made at least on an annual basis.
To enable compliance with the nondiscretionary bonus option, the final rule allows employers to make a “catch-up” payment at the end of each 52-week period. This Compliance Overview explains how this provision can be used.
Catch-Up Payment Provision
Employers should review their EAP exempt employee’s compensation annually (every 52 weeks) to make sure all requirements for the exemption have been met. If at the end of the 52-week period the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid is less than the required salary level, the employer has one pay period to make up the shortfall for the 52-week period.
If the catch-up payment is not made within the pay period immediately following the 52-week period, the EAP overtime exemption does not apply and the employer will need to determine whether there are any overtime payments owed during the entire previous 52-week period.
Discretionary Versus Nondiscretionary Bonuses
As noted above, the final rule allows employers to use nondiscretionary bonuses to satisfy up to 10% of the standard salary level.
A bonus is discretionary when the employer retains the freedom to decide what should be done with that bonus. Freedom to decide may include the timing and amount of the bonus. Similarly, the bonus may be paid for any specific reason or for no reason at all. A discretionary bonus should not create an expectation of payment from the employee and it should be seen as arbitrary and almost whimsical. This means that the bonus cannot be due or tied to any prior promise, contract or agreement, or with employee performance (meeting specified goals or standards). To maintain bonuses as discretionary, employers should be careful and avoid any form of advance notice or other cautions that may, in any way, raise the expectation of payment.
Promised bonuses such as those announced to employees to induce them to work more efficiently or to remain with the firm are considered nondiscretionary. Examples include bonuses based on a predetermined formula (for example individual or group production bonuses), bonuses for quality and accuracy of work, retention bonuses, and commission payments based on a fixed formula.
TIG Advisors understand the difficult situations you may find yourself in when going through your provision programs, but we want to be able to help you. Click on this link for some more resources to help you understand “catch-up provision” and it also contains some examples to put this concept into more real-world terms.
