Bonuses Paid By Third Party Not Necessarily Included in Employee’s Regular Rate

The U.S. Court of Appeals for the Third Circuit rejected the Department of Labor’s position that all third-party bonuses must necessarily be included in an employee’s regular rate of pay for purposes of computing overtime.

In DOL v. Bristol Excavating, Inc., a contractor’s employees were eligible for the client company’s bonus programs (for efficiency, for pacesetting, and for safety), which were calculated by the client company and paid to the contractor, who then deducted taxes and fees before issuing payment of the bonus to the employee, separately from any paycheck. The DOL asserted that these third-party bonus payments should automatically be included in the calculation of the employees’ regular rate of pay because they were renumeration for employment.

The Third Circuit found the DOL’s position to be unsupported by the Fair Labor Standards Act, case law or agency practice. Rather, the Third Circuit relied upon a 1954 Supreme Court case, Walling v. Youngerman-Reynolds, which stated “[t]he regular rate by its very nature must reflect all payments which the parties have agreed shall be received regularly during the workweek.” In the current case, there was no explicit agreement to include the bonus payments in the regular rate of pay. The existence of an implicit agreement depended on “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.”

In the present case, the Third Circuit found an open question as to whether the employees knew of the specific requirements to earn the efficiency and pacesetter bonuses, and it was therefore unclear as to whether an implicit agreement existed as to those bonuses. As to the safety bonus, however, the Third Circuit found an agreement, as the employees knew of the specific criteria used to determine the bonus – no accidents or injuries on the job – and the amount of the bonus. In addition, the contractor was involved in the management of the program as it was responsible for tracking and reporting which employees earned the safety bonus.