Under the FLSA, Who Has the Burden to Prove a Bonus Is Discretionary, and Why Does It Matter?

September 11, 2020 by

The Fair Labor Standards Act (“FLSA”) requires employers to pay non-exempt employees who work more than 40 hours a week of overtime one and one-half times the employees’ regular rate of pay. The FLSA defines regular rate as the hourly rate actually paid the employee for all remuneration for employment. The regular rate must reflect all payments which the employer and the employee have agreed is to be received regularly during the workweek, exclusive of overtime payments. Once the parties have decided on the amount and mode of payment, the regular rate is determined by dividing the total pay an employee received in a workweek by the total number of hours the employee worked in that workweek.

Most payments that an employee receives in a workweek must be included in the total pay in calculating the regular rate, but there are exceptions. Under the FLSA, remuneration that an employee receives is not included in the total pay to calculate the regular rate if both 1) the fact that payment is to be made and 2) the amount of the payment, are determined at the sole discretion of the employer and not pursuant to any prior agreement or promise causing an employee to expect such payments regularly. Thus, if a bonus is discretionary the amount of the bonus is not included in the total pay in calculating the regular rate, resulting in a lower regular rate that would be used to determine the amount of any overtime payments. For example, if an employee works 40 hours in a workweek and is paid $500, the regular rate would be $12.50 an hour. If that same employee worked 40 hours and was paid the usual pay of $500, but in addition received a bonus of $500 that was discretionary, for a total of $1000 pay for that workweek, the regular rate would be the same although the employee would have received more pay. If the employee worked 40 hours and received the usual pay of $500 for that workweek but in addition received a $500 bonus that was not discretionary, the bonus amount would be included in the total pay of $1000 to figure the regular rate, which would be $25 an hour. So, is it the employer or the employee who has the burden to prove that a bonus is or is not discretionary? A recent opinion from the US Fifth Circuit Court of Appeals addressed this burden and that opinion is discussed below.

Recent US Fifth Circuit Court of Appeals Decision

In Edwards v. 4JLJ, L.L.C., No. 19-40553, an opinion issued by the US Fifth Circuit Court of Appeals on September 2, 2020, and as a matter of first impression, the court decided the question of who has the burden of proof on whether a bonus is or is not discretionary. If it is discretionary under the criteria set forth above, then the amount of the bonus is not included in the total pay to calculate an employee’s regular rate. Contrary to what one might logically conclude, the court held it was the employee’s burden to prove that a bonus was not discretionary, which if so, means that the bonus must be included in the total pay to calculate the employee’s regular rate.

The court held it was the employee’s burden to prove that a bonus was not discretionary, which if so, means that the bonus must be included in the total pay to calculate the employee’s regular rate.
The court reached its decision by analyzing the obligations that an employer and employee have under the FLSA. The employer has an obligation to comply with the FLSA and pay employees properly. In a dispute under the FLSA, the employee has the burden to prove all elements of the employee’s claim. That is, the employee must prove that the employee was not paid properly for work performed because the employer did not comply with the FLSA. In such a dispute, an employer may want to show that an employee is exempt from an FLSA requirement, and if so, the employer has the burden to assert and prove that an exemption applies. The court, however, pointed out that the section of the FLSA that sets forth whether a bonus is discretionary is not an exemption but rather an instruction for compliance with the FLSA. As a result, the court determined that the employee, as an element of the employee’s claim that the employer has not complied with the FLSA, has the burden to show that the bonus was not discretionary and must be included in the total pay for calculating the regular rate. So, it matters whether a bonus is discretionary and who has the burden to prove that it is not.

The Bonuses in Question

The employer in the Edwards case was a provider of oil well pump and frack services. It paid employees two types of bonuses, neither of which was considered in the calculation of employees’ regular rates and overtime wages.

One was a stage bonus, which was offered for each stage after the fracking of a well was completed. The bonus was not stated in writing and the evidence was that some employees sometimes received a stage bonus in the amount of $75 for the first stage and later $100, but there was no evidence on how employees came to expect a stage bonus, who determined the amount, when the amount was determined, whether all employees typically received such bonuses, or whether the amount ever varied. The court determined that the employees had the burden to show that the stage bonus was non-discretionary and that the evidence offered by the employees failed to show a lack of discretion in allocating the stage bonus. Since the employees did not prove that the employer had failed to comply with the FLSA, excluding the stage bonus in the calculation of the regular rate and overtime was proper.

The other bonus was a performance bonus, and it was in a written agreement. Although it stated in all capital letters and in large typeface, “THIS BONUS IS NOT TO BE EXPECTED, IT IS TO BE EARNED,” the agreement set forth the criteria by which the employees would be evaluated and considered for the performance bonus along with the specifics regarding how the amount of the bonus would be calculated. The court determined that the employer did retain discretion over whether to award the performance bonus, but did not have discretion over the amount if the employer decided to award the bonus. Since the employer did not retain discretion over both the decision to award a performance bonus and the amount of the bonus, the bonus was not discretionary and should have been included in calculating the employees’ total pay and regular rate for overtime purposes.

Pointer for Employers

Although the court held that employees have the burden to prove that a bonus is not discretionary, which results in a bonus being included in an employee’s total pay in calculating the employee’s regular rate and overtime pay, employers should not become complacent because of such ruling. Employers should remember that it is the employers’ legal obligation to comply with the FLSA. If employers desire to provide bonuses for their employees, and want the award of the bonus to be discretionary, the offer should state that it is discretionary and must show that the employer retains the sole discretion over both whether the bonus is to be given and also the amount.

John L. Freeman
john@brownfoxlaw.com

An AV-rated litigator, Mr. Freeman’s primary areas of practice are employment law, civil litigation and related areas of business litigation. He regularly advises clients regarding employment law practices, non-competes, discrimination and other employment related matters. In 2023, the State Bar…Read More

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