Is it a Bonus or is it a Tip:  When Must Payments from Third Parties be Counted When Calculating Overtime Pay?

The Third Circuit recently addressed when a bonus an employee receives from someone other than his or her employer counts toward the employee’s “regular hourly rate” of pay under the Fair Labor Standards Act (“FLSA”).

When Must Payments from Third Parties be Counted Toward Overtime Pay?The FLSA is a federal law that, among other things, requires employers to pay most non-exempt employees time-and-a-half when they work more than 40 hours in a workweek.  As a result, the higher the employee’s regular hourly rate, the higher the overtime pay premium the employee is entitled to receive.

The case involves employees of Bristol Excavating Inc., an excavation contractor, who work at sites owned by another company, Talisman Energy Inc.  Since the employees work 12 ½ hour shifts every day for two straight weeks, followed by a week off, they routinely work substantial overtime hours.

Talisman pays bonuses based on safety, efficiency and completion of work to individuals who work at its sites whether or not they are Talisman employees.  When Bristol’s employees learned about these bonuses, they asked if they could receive them too.  Talisman agreed to pay these bonuses to the Bristol employees and Bristol agreed to administer and distribute the bonuses.

During a routine inspection, a United States Department of Labor (“DOL”) auditor discovered that Bristol was not including the Talisman bonuses when it calculated the employees’ regular hourly rates, and as a result was not counting the bonuses when it calculated their overtime premiums.  Since Bristol refused to start including the bonuses in its overtime calculations, the DOL filed a lawsuit against the company under the FLSA.

The District Court ruled that, unless a statutory exemption applies, all payments an employee receives for their work is part of their compensation, irrespective of the source of the payment, and thus must be included when calculating the employee’s regular hourly rate.  As a result, it concluded that Bristol had violated the FLSA by failing to include the Talisman bonuses when it calculated the employees’ overtime pay.  Bristol appealed.

In Secretary United States Department of Labor v. Bristol Excavating, Inc., the Third Circuit held that incentive bonuses must be included in overtime pay calculation only if the parties expressly or implicitly agreed to do so. In essence, it distinguished incentive bonuses received from third parties, which must be included when calculating the employee’s regular rate of pay, from tips or gratuities received from customers and clients, which do not need to be included in those calculations.

More specifically, the Third Circuit ruled that for a payment from a third party to be part of an employee’s regular rate of pay, all three of the following factors must be true:

  • The employee knew the specific requirements to receive the payment before he performed the work;
  • The payment is for a “reasonably specific amount”; and
  • The employer had significant involvement in facilitating payment of the bonus and was not merely a pass-through.

If all three of those factors are true, then there has to be a “holistic assessment” of the extent to which the employer is involved in the bonus program to determine whether it “can fairly be said that the employer and employees have adopted the third-party incentive bonuses as part of their employment agreement.”  In that assessment, the employer’s “role in initiating, designing, and managing the incentive bonus program will likely be of high importance.”

Applying that test, the Third Circuit ruled that the safety bonus had to be counted toward the employees’ regular rate of pay because the employees knew the specific conduct necessary to earn it — no accidents or injuries at the worksite — and knew the amount of the bonus was $20 or $25 per day.  Further, it was undisputed that Bristol did more than act as a mere pass-through in facilitating payment of the bonus.

However, the appellate court concluded that it did not have enough information to determine whether the bonuses based on efficiency and completion of work were intended to be incentive bonuses or discretionary gratuities from a customer.  Accordingly, it remanded the case to the District Court to address that issue.