What is incentive pay?
Incentive pay is defined as additional compensation awarded to employees for results they achieved, i.e “pay for performance”. All commission payments are considered incentive pay, and some types of bonuses, such as non-discretionary bonuses, also fall in this category. Read more about non-discretionary bonuses in the U.S. DOL Fact Sheet 56C, and how to record them in our help center article. Be sure to also check applicable state and local law as there may be different requirements.
When is overtime owed on incentive pay and who is eligible?
The amount of overtime pay due to an employee is based on the employee’s regular rate of pay and the number of hours worked in a workweek. Under the FLSA, all compensation for hours worked, services rendered, or performance is included in the regular rate of pay, except for certain enumerated types of payments.
Generally, discretionary bonuses may be excluded from the regular rate, while non-discretionary bonuses may not. Whether a bonus is discretionary or non discretionary is fact-specific and the label assigned to a bonus is not determinative.
When a non-exempt employee receives incentive pay, such as a non-discretionary bonus, for a workweek(s) during which they worked overtime, the regular rate for those workweeks need to be recalculated and the additional overtime on the incentive pay must be paid out.
How does Justworks help me pay overtime on incentive pay?
The Justworks Payments Center has built-in features to help you comply with this requirement:
- A required field to classify a bonus as discretionary or non-discretionary
- Automatically detecting when a non-exempt employee worked overtime (based on hours approved in Timecards) during the work period covered by the non-discretionary bonus
- Automatically calculating the overtime wages and adding it to the incentive pay
We want to help make this complex topic simple, so we will help you calculate and pay out overtime on incentive pay. When you schedule a non-discretionary bonus or a commission payment, we will alert you if any of the employees receiving this one-time payment has worked overtime during the applicable work period you have entered. We can detect this immediately based on the hours that have been approved on Timecards.
If we detect that an employee worked overtime in the applicable pay period, we will automatically calculate the overtime owed on this incentive pay, and add it to the total amount you’re scheduling.
For non-discretionary bonuses and commission payments, we use the following formula to calculate the additional pay owed:
Additional pay = 0.5 * (Incentive pay amount / All hours in the work period) * Overtime hours in the work period
In this case, the overtime rate is 0.5 * (Incentive pay amount / All hours in the work period).
Before you submit the incentive pay, you’ll have a chance to review the amounts that will be paid out. As you can see in the example below, this includes a breakdown of both the incentive pay amount and the additional payment (overtime) owed.
How will this be taxed?
Overtime on incentive pay will be taxed at the same rate used for the supplemental pay it’s attached to.
What about flat-sum bonuses in California?
Flat-sum bonuses are non-discretionary bonuses that are not determined by hours worked (for example, attendance bonuses or safety bonuses). For flat-sum bonuses in California, we use the following formula to calculate the additional pay owed:
Additional pay = 1.5 * (Flat-sum amount / Straight hours in the work period) * Overtime hours in the work period
In this case, the overtime rate is 1.5 * (Flat-sum amount / Straight hours in the work period).
Where can I reference this information after I schedule the payment?
Employees receiving overtime on their incentive pay will see a breakdown of the payment (including the overtime on incentive pay amount, the number of overtime hours, and the overtime rate) included in the Notes section of their pay stub. This detailed breakdown to the Notes section is important for compliance with wage statement requirements. When reviewing the Invoices and and Payroll Report, the overtime on incentive pay will be reflected along with the total incentive payment in one aggregated sum.
You will not see these Notes when scheduling the payments, but you can view them and adjust them if needed when editing the employee’s individual payment.
What if I need to edit the incentive payment?
If you need to edit the original incentive pay amount, it’s best to cancel the payment and reschedule a new incentive pay so we can help calculate the overtime on incentive pay for you. For example, if you intended to schedule a $1,000 commission, but accidentally scheduled a $100 commission, it would be best to cancel the $100 commission and schedule a brand new commission for $1,000. To do so, go to the employee’s profile under “View payments” and cancel the payment from the One-time payments tab. You can then schedule a new commission payment from the same page.
If you need to edit the total amount of the payment because you want to change the overtime we calculated, go to the employee’s profile, click View Payments, and edit the payment in the One-time payments tab. In this case, we will give you full control over the total amount paid and will not calculate any overtime that may be owed on the incentive pay.
Are there cases when Justworks will not calculate overtime owed on incentive pay?
There are three cases where Justworks can’t calculate this additional payment owed for you:
- You are scheduling the incentive pay with an applicable work period that hasn’t finished yet, or for which the applicable timecards have not been approved yet
- in this case, since Timecards are not yet approved, we won’t know the total hours worked by your employee, so you will need to schedule any applicable overtime on incentive pay owed after you have approved the timecard using the Other supplemental pay type (see steps above).
- The data we have on your employees’ hours is at the weekly level, but you have entered a work period that does not align with the Sunday-Saturday workweek
- in this case, Justworks can’t know which hours are attributable to this payment, so we are not adding additional pay to the incentive pay you’re scheduling, as we would risk to underestimate that amount.
- There are missed timecards in the past that you’ve had to make up using the off-cycle salary pay type:
- in this case, since we are using the hours approved in Timecards, there may be a gap in the hours recorded in Justworks for your employees, so we recommend that you double check and adjust the calculation if there were overtime hours in those missed timecards.
- If you’re paying a flat sum bonus to an employee working in California, and you select a work period for which there’s only overtime hours and no regular hours, we can’t calculate the overtime on incentive pay for you given the denominator would be zero.
Be sure to schedule any applicable overtime owed on incentive pay after you have approved the timecard. You can do so by using the Payments Center and selecting the Other Supplemental pay type (see steps above).
What if I need to calculate the overtime owed and schedule it on my own?
If you have missed timecards in the past for an employee, or if we can’t calculate the overtime owed because of the reasons laid out above, we might not have all the hours we need to calculate the overtime on incentive pay for that employee. In this case, you will need to schedule individual payments per employee to ensure that the information in the Notes section is specific to the employee. As a reminder, information in the Notes section will be reflected on the employee’s paystub. You can schedule these payments by following these steps:
- Head to the Payments Center and select “Other supplemental pay” type to schedule the overtime on incentive pay.
- To comply with wage statement requirements, add the following to the Notes when scheduling that payment:
- Overtime on incentive pay: $Total amount of overtime paid on incentive pay
- Overtime hours in the applicable work period: XX.YY hours
- Overtime rate: $XX.YY/hr
- If any of the information added to the Notes differs per employee, you should be scheduling these payments one employee at a time.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.