Question

I’m aware that the Fair Labor Standards Act (FLSA) recognizes two separate types of bonuses, discretionary and non-discretionary. And I know that discretionary bonuses do not have to be counted as part of an employee’s wages, but non-discretionary bonuses do. We are investigating the idea of offering a referral bonus. Are referral bonuses supposed to be included in an employee’s overtime calculations?

Answer

Referral bonuses do not as a rule need to be included as part of the employee’s regular rate of pay and therefore need not be included in any overtime calculation, according to a 2020 Department of Labor (DOL) opinion letter. The opinion letter does, however, identify one exception whereby some portions of a referral bonus could be included if the employee has a contractual right to it.

Under the Fair Labor Standards Act (FLSA), any calculation of overtime begins with calculating an employee’s regular rate of pay. The regular rate includes all remuneration for employment paid to, or on behalf of the employee, for performing his or her job, including payments such as hourly wages and salaries for non-exempt workers, non-discretionary bonuses, shift differentials, on-call pay and commissions.

The regular rate of pay does not include payments for health insurance, paid leave, holiday and other discretionary bonuses, and certain gifts. FLSA fact sheet 56A includes a more detailed discussion of exceptions to the regular rate.

A pure recruiting bonus given to production workers is not tied to their work and the bonus may be excluded from the regular rate of pay.

The request for opinion letter sent to the DOL by an employer considering establishing a referral bonus program posed the question of what happens when an employer adopts a referral bonus program payable in two equal payments. In the letter, the company described the referral payment as “significant.” Parenthetically, the use of the term “significant” does not provide a great deal of guidance for an employer considering establishing its own referral bonus program.

The first payment would be made when the employer hires the referred employee. The second installment would be paid on the one-year employment anniversary of the hired employee if both the referred and referrer are still employed.

In analyzing the information from the employer, the DOL determined that the second payment would be a longevity bonus, not a referral bonus. The employer also made it clear that only employees not in Human Resources and without any responsibilities associated with employee recruitment, hiring, selection or the final decision on whether the referred job applicant is hired would be eligible for the bonus. Participation in the referral program would be voluntary, would not require significant time beyond submitting the name of a potential recruit and would be limited to after-hours social conversations.

Based on these facts, the DOL determined that the first installment of the referral bonus would not have to be included in the regular rate, as the employees participating in the referral program were not hired to recruit new workers.

The second payment presented a more difficult challenge. In its review, the DOL determined that the second installment might be excludable as a gift. To qualify for the exclusion, the bonus must meet the following conditions:

• Not measured by hours worked, production or efficiency.
• Not paid due to a contract.

The DOL opined that the proposed referral bonus program met the criteria stated in the first bullet but was not so sure of the second.

As the answer is not clear-cut on the contractual question, employers attempting to adopt a program like this face a dilemma. The more the referral bonus looks like a contractually based promise the more likely the employer will have to include it in the regular rate and base any overtime payments on the adjusted regular rate. On the other hand, if employees believe that the second payment (especially a payment that is “significant”) may not be factored into their regular rate of pay, they may be less inclined to make referrals.

AIM members interested in discussing this or any other human resources matter may contact the AIM Employer Hotline at 1-800-470-6277.