No. Under federal law, non-exempt employees are entitled to overtime pay (at 1.5 times their regular rate) whenever they work more than 40 hours in a workweek. Paid time off doesn't count towards hours worked when determining whether overtime is due, unless you have promised otherwise. Note: Some states require overtime in additional circumstances, such as when employees work more than eight hours in a single workday. Therefore, the non-exempt employee in this scenario may be entitled to overtime in some states.
Question #3: If a non-exempt employee works on a holiday, how much must they receive in premium pay under federal law?
Federal law doesn't require premium pay for work on a holiday, but some state laws do. Under federal law, there's generally no requirement to pay non-exempt employees a premium for working on a holiday, unless doing so results in the employee working more than 40 hours in the workweek. However, there are exceptions in some states where some employers may be required to provide premium pay regardless of how many hours the employee worked. Absent a state requirement, some employers choose to offer premium pay to employees as an incentive to work on a holiday.
Question #4: If an employer provides premium pay for work performed on a holiday, must they include that premium pay when determining the employee's regular rate of pay for the purposes of overtime under federal law?
When determining an employee's regular rate of pay, an employer must include premium pay for work performed on a holiday if the premium pay is less than 1.5 times the employee's normal base wage. Under federal law, an employee's regular rate of pay for the purposes of calculating overtime includes their hourly rate plus the value of nondiscretionary bonuses, shift differentials, and certain other forms of compensation. However, under federal law, employers may exclude premium pay for work on a holiday when determining an employee's regular rate provided it is at least 1.5 times the employee's normal base wage (see 29 CFR 778.203). Check your state law, which may have additional rules.
Question #5: When determining an employee's regular rate of pay for the purposes of overtime, must year-end bonuses be included?
It depends on whether the bonus is considered nondiscretionary or discretionary. When determining an employee's regular rate of pay for the purposes of overtime, employers must include nondiscretionary bonuses. A nondiscretionary bonus is announced to employees in advance typically to encourage them to work more efficiently and/or to remain with the company. With this type of bonus, employees expect that if they meet certain criteria (such as attendance or productivity targets), they will get a bonus. Examples include bonuses for meeting set production goals, retention bonuses, and commission payments based on a fixed formula. Note: Most bonuses are considered nondiscretionary.
By contrast, discretionary bonuses aren't announced or promised in advance (and do not need to be included when calculating overtime). For example, if you decide at the end of the year to surprise employees with a bonus, this would generally be considered a discretionary bonus.
Question #6: If a nondiscretionary bonus is earned over a series of workweeks, how must the bonus be included in the regular rate of pay?
It must be included in all overtime weeks covered by the bonus period. If the nondiscretionary bonus is earned over a single workweek, the bonus is added to the employee's regular earnings for that workweek when determining the regular rate of pay. However, if the bonus is earned over a series of workweeks, the bonus must be included in the regular rate of pay in all overtime weeks covered by the bonus period. If necessary, you may temporarily disregard the bonus in computing the regular hourly rate until you know the bonus amount. Then, apportion it back over the workweeks of the period during which the employee earned the bonus.
Question #7: For 2018, how are bonuses typically taxed for federal tax purposes?
Bonuses up to $1 million are typically taxed at a flat rate of 22 percent (a higher percentage for amounts over $1 million). Bonuses are generally considered supplemental wages and are subject to federal taxes as well as certain state taxes. For federal taxes, when an employee receives $1 million or less in supplemental wages during 2018 and those wages are identified separately from regular wages, the flat withholding is 22 percent. When an employee receives in excess of $1 million in supplemental wages, the withholding on the excess is 37 percent, according to the IRS.
Question #8: Are bonuses given in the form of cash or in a gift card to an online retailer considered taxable by the IRS?
Yes. Many types of bonuses are considered taxable by the IRS. For example, cash, a gift certificate, gift card, and similar items that can easily be exchanged for cash are typically considered taxable wages, regardless of the amount (see IRS Publication 15-B). However, if an employer gives a turkey, ham, or other item of nominal value for the holidays, it's generally not considered taxable income.
Conclusion:
As the year winds down, review your policies and practices to make sure you're paying employees in accordance with federal, state, and local rules.
This content provides practical information concerning the subject matter covered and is provided with the understanding that ADP is not rendering legal advice.