Now that 2012 has come to an end, you may be in the process of calculating annual or quarterly bonuses to be paid to your employees in early 2013. Perhaps you already paid a bonus as a holiday gift to your employees. In either case, have you contemplated the overtime liability that may result from paying such a bonus to non-exempt employees?

As most employers are likely well aware, the Fair Labor Standards Act (“FLSA”)requires that non-exempt employees be compensated at a rate of 1½ times their “regular rate” for hours worked over 40 in that workweek. A lesser known rule, however, is that an employee’s“regular rate” must include “all remuneration for employment paid to, or on behalf of, the employee,” including certain bonus payments.

You may provide your employees a bonus for a variety of reasons: to reward company success or past performance; to induce future productivity, attendance or performance; or to retain quality employees. But unless such bonuses satisfy a recognized exception under the FLSA, they must be included in the calculation of overtime due to non-exempt employees.

Two common exceptions include: (1) discretionary bonuses and (2) bonuses paid as a gift. Employers should take a close look before concluding that one of these exceptions applies. Simply calling a bonus “discretionary” and/or a “gift” will not suffice. Each exception includes specific components that must be satisfied by the facts at hand before it will apply.

If no exceptions apply, you must include the bonus as part of the “regular rate” in calculating overtime. You must follow this mandate even if you do not know the amount of the bonus until sometime after you have already paid overtime for a particular pay period (e.g., annual bonuses). In that case, once you know the amount, the bonus must be apportioned back over the workweeks of the period during which it was earned and included as part of the employee’s regular rate for those workweeks. If the employee worked more than 40 hours in any of those workweeks, you must make up any difference between overtime already paid and overtime due based on the higher regular rate.

With the number of wage and hour lawsuits continuing to rise, employers are well advised to consult with legal counsel about the overtime liability that may be implicated by bonus payments they have made and/or are planning to make in the near future. Employers should also discuss with their legal counsel strategies for how to avoid such liability, as well as the administrative challenges of implementing the above overtime calculation, going forward.