Labor & Employment Law Daily Bonuses paid by third party not included in regular rate without employer-employee agreement (1)
Thursday, August 22, 2019

Bonuses paid by third party not included in regular rate without employer-employee agreement

By Wayne D. Garris Jr., J.D.

The DOL’s assertion that all third-party bonuses must be included in regular rate of pay for calculating overtime was not supported by the FLSA, case law, or agency practice.

Employers are not required to include bonuses from third parties in the regular rate of pay when calculating overtime pay, the Third Circuit held, absent a requirement between the employer and employee. After reviewing the bonuses that a natural gas production company offered to the employees of one of the company’s contractors, the court, reversing the district court, found that only one of the bonuses constituted remuneration for employment and should be included in the regular rate of pay (DOL v. Bristol Excavating, Inc., August 20, 2019, Jordan, K.)

Contractor’s employees eligible for bonus program. Bristol Excavating, an excavation contractor, entered a master service agreement with Talisman Energy to provide services be performed by Bristol employees. After the Bristol employees began working at the Talisman sites, they learned of a Talisman bonus program available to workers, including bonuses based on safety, efficiency, and completion of work, and Bristol’s GM confirmed with Talisman that Bristol’s employees were eligible for the bonuses.

Bristol employees were informed of the three available bonuses. Talisman retained sole discretion in determining whether the requirements for a bonus had been met. Once Talisman determined a particular bonus was earned, it would advise Bristol, which would then issue an invoice to Talisman for the amount of the bonus, and Talisman issued payment. Bristol deducted taxes and fees prior to issuing a check to the employees, which was issued separately from employee paychecks. The amount of the bonus was not included in the calculation of the employees’ regular rate of pay. At no point did the contract between Bristol and Talisman include a provision on the bonuses.

DOL gets involved. A DOL investigator advised Bristol that the bonuses should be included in its employees’ regular rate of pay for overtime calculation, but Bristol refused. The Secretary of Labor filed suit against Bristol alleging that its failure to include the bonus payments in its employees’ regular rate of pay for calculating overtime violated the FLSA. The district court, granting summary judgment for the DOL, concluded that the bonuses must be included in the regular rate of pay because they are remuneration for employment and do not qualify for any of the FLSA’s exemptions. Bristol appealed.

Remuneration defined by agreement. The Third Circuit began by noting that the FLSA defines the regular rate to include “all remuneration for employment paid to, or on behalf of, the employee.” The FLSA, however, does not define “remuneration for employment.” The court rejected DOL’s argument that the FLSA’s silence means that all sources of income qualify as remuneration for employment and concluded that remuneration is “what the employer and the employee agreed would be paid for the job.”

Support for the court’s definition. The appeals court cited several FLSA tip-credit provisions and discretionary incentive bonus exemptions as evidence that the statute intended to exclude third-party payments from regular rate of pay absent an agreement. The court also cited the Supreme Court in 1945’s Walling v. Youngerman-Reynolds, which stated that “[t]he regular rate by its very nature must reflect all payments which the parties have agreed shall be received regularly during the workweek, of overtime payments.” This definition protects the rights of employers and employees, the court reasoned.

DOL’s rebuttal. DOL offered three Wage and Hour Division Opinion Letters, a district court opinion, and the purpose of the FLSA itself to argue that compensation for performing work qualifies as remuneration for employment, regardless of whether the payment is provided by a third party and no agreement exists. The court dismissed the Opinion Letters and case law finding they were not analogous.

FLSA purpose. Rather, in the court’s view, the DOL’s proposed definition actually ignored the FLSA’s purpose of protecting the well-being of workers “without substantially curtailing employment or earning power.” In the instant case, the court pointed out, if Bristol knew that permitting the employees to qualify for the bonuses would increase its labor costs, it may have said no when the employees asked if they could accept them.

Implicit agreement. The Third Circuit next turned to the bonus payment at issue. Because there was no explicit agreement to include bonus payments in the regular rate of pay, the court had to determine whether an implicit agreement existed. In order to find an implied agreement to treat third-party incentive bonuses as remuneration for employment, “a fact finder should consider whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work; whether the payment itself is for a reasonably specific amount; and whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle,” said the court.

Employer’s involvement. If all of the listed factors are present, a factfinder must next determine the level of the employer’s involvement in the third-party bonus program. The employer must do more than just serve as a pass-through from the third party to the employees; the employer must have a role in initiating, designing, and managing the incentive bonus program.

Efficiency and pacesetter bonuses. A genuine issue of fact remained here as to whether the efficiency and pacesetter bonuses were remuneration for employment. The record showed that there was some question whether employees knew the specific requirements to earn a set bonus in advance of performing the relevant tasks. The evidence showed that employees were aware that good performance could lead to a bonus, but no evidence that they were informed of the specific requirements for a bonus.

Safety bonus. However, the appeals court found that the safety bonus was remuneration for employment. The Bristol employees knew the specific conduct necessary to earn the bonus—no accidents or injuries during the job. Employees also knew the specific compensation they would receive. Further, Bristol tracked and reported which employees earned the bonus, invoiced Talisman for payment on behalf of its employees, and collected a processing fee. Bristol’s level of involvement supported a conclusion that Bristol adopted the safety bonus as part of the regular rate of pay.

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