Seyfarth Synopsis: On Tuesday, the Third Circuit issued a decision rejecting the U.S. DOL’s general position that incentive bonuses paid to employees by a third-party must be factored into overtime pay. While the decision merely endorses a more tempered “it depends” view, it provides welcome news and guidance for employers that provide labor to third-parties.

Imagine you’re an employer that staffs non-exempt employees to work on a project at a client site. Because you’re an avid reader of this blog, you are the Michael Jordan of wage-hour compliance, taking near-perfect steps to ensure employees record and are paid for each minute of work on the project, including overtime. Each week, you pay the employees their hourly rate for every hour worked, including time and a half for overtime hours.

Your employees finish the project, and the client is thrilled with their work. The client is so pleased, in fact, that it includes your employees on production and safety bonuses that it issues to its own staff, remitting the payments through you, their employer. And that leads to a question: must you, a compliance-minded employer, now dig deeper into your own pocket to pay overtime on those bonuses, just as you would for a non-discretionary bonus that you establish and pay yourself?

While some courts and the U.S. DOL have answered this question in the affirmative, the Third Circuit rejected that position in a decision issued earlier this week. Instead, the court ruled, the question turns on the agreement between the employer and the employee.

The case was brought by the Secretary of the U.S. DOL against Bristol Excavating Inc., a small excavation contractor, and Talisman Energy, Inc., a natural gas production company. Bristol entered into an agreement with Talisman to provide equipment, labor, and other services at Talisman drilling sites. As part of the agreement, Bristol employees worked at Talisman’s sites.

After working on Talisman Energy projects, some Bristol employees learned that Talisman had a practice of paying its own employees bonuses for safety, efficiency, and completion of work. That led them to ask Talisman if they could get in on the action. After clearing it with Bristol, the employees’ employer, Talisman said yes. It paid the bonuses through Bristol.

Eventually the DOL conducted a routine audit of Bristol’s offices. After learning about the Talisman bonuses, the Department determined that Bristol’s failure to include them in its employees’ “regular rate” resulted in underpayment of overtime. For background, the “regular rate” is defined to include “all remuneration for employment,” and it’s well established that this encompasses non-discretionary bonuses. (As an example of a bonus that should be included, the Third Circuit cited National Lampoon’s Christmas Vacation, where Clark Griswold, upon receiving a jelly-of-the-month club membership in lieu of a bonus he’d received seventeen years in a row, decries, “You don’t want to give bonuses, fine. But when people count on them as part of their salary, well…”)

Here, the DOL took the position that the rule requiring inclusion of non-discretionary bonuses in the regular rate of pay applies irrespective of who pays the bonuses. Bristol disagreed. Ultimately the dispute landed in litigation, with the DOL filing suit against Bristol and Talisman for underpayment of overtime compensation in violation of the FLSA. After a magistrate judge sided with the DOL, the case wound its way to the Third Circuit’s docket.

On Tuesday, a three-judge panel sided with the employers on two of the three bonuses at issue. In a harsh rebuke, the Court opined that the DOL’s “recently discovered” reading of an “80-year-old statute“—a reading that requires all remuneration employees receive for their work from any source to be included in the regular rate—goes too far. To be clear, however, the Court did not go so far as to say that third-party bonuses will always steer clear of the regular rate. Instead, the answer is a classic, “it depends.”

Specifically, the Third Circuit ruled, whether a third-party payment qualifies as remuneration for employment that must be included in the regular rate depends on whether “the employer and employee have effectively agreed it will.” Simply allowing employees to participate in a third-party bonus program does not establish an implicit agreement. Instead, relevant factors to consider include:

  • Regular payment of the bonus. As a threshold matter, a bonus needs to be “regularly and actually received by the employee” for it to be potentially included in the regular rate.
  • Employer’s use of the bonus to drive behavior. Further, the Court explained, it would be “significant” to a finding that a bonus must be included in the regular rate if “an employer regularly and predictably relies on [the] bonus to induce certain behavior…”
  • Employer’s involvement in the bonus program. The Court also noted that “the deeper an employer gets into the creation, management, and payment of an incentive bonus program, the more those bonus payments begin to look like part of the regular pay structure to which the employer has agreed…”

While the Third Circuit’s decision is binding only on federal courts in Delaware, New Jersey, and Pennsylvania, it provides welcome guidance for employers grappling with potential unintended consequences of third-party bonus programs. Employers should continue to think carefully, and with an eye toward the law of their jurisdiction, about whether to allow employees to participate in such programs. If they do allow it, employers should consider taking a “hands off” approach to the program. Alternatively, another option might be to require that the third-party calculate bonuses, if any, as a percentage of total earnings (including overtime pay), which would avoid the need to calculate and pay additional overtime. (Of course, that alternative should be carefully weighed in light of the joint employment concerns it might raise.)