While it is uncertain when the Department of Labor’s (DOL) FLSA overtime rule ruling will be implemented, what is clear is that a significant number of workers will be reclassified from an exempt status to a non-exempt status.  (The original estimate was that 4.2 million workers status would be affected.)

Besides the time and a half pay for hours worked in excess of forty hours, there are other situational remuneration rules regarding non-exempt pay, one of which regards incentive (or bonus) pay.

FLSA requires that incentive or bonus payments that are non-discretionary (i.e., formulaic or pre-defined by performance) be considered an adjustment to the base salary rate in the fiscal quarter in which the payment was received.  The resulting adjusted base salary rate is then to be applied at time and one-half to any overtime worked in the quarter.  The incremental difference between the actual overtime paid and the newly adjusted overtime amount is to be paid to the affected employee.

This process is time-consuming and administratively burdensome such that most companies pay discretionary bonuses to non-exempt employees (i.e., not subject to performance.)

In anticipation of this FLSA ruling (whenever it occurs), companies that have performance-based annual incentive plans for all exempt employees should be planning a strategy and communication plan to their employees who stand to be reclassified to a non-exempt status.

The two choices are:  1) keeping them in the former program with a target award that they’re used to (i.e., doing nothing), which initiates the overtime re-calculation process (if overtime is applicable to those employees); or 2) moving the newly classified non-exempt employees to the discretionary award category (like other non-exempts.)  However, without proper communications, the latter action might introduce a level of doubt and mistrust to those employees accustomed to getting a performance driven payment and now looking at an unknown non-incentive award process.