U.S. Code of Federal Regulations

Regulations most recently checked for updates: Jan 31, 2023

§ 778.503 - Pseudo “percentage bonuses.”

As explained in § 778.210 of this part, a true bonus based on a percentage of total wages - both straight time and overtime wages - satisfies the Act's overtime requirements, if it is paid unconditionally. Such a bonus increases both straight time and overtime wages by the same percentage, and thereby includes proper overtime compensation as an arithmetic fact. Some bonuses, however, although expressed as a percentage of both straight time and overtime wages, are in fact a sham. Such bonuses, like the bonuses described in § 778.502 of this part, are generally separated out of a fixed weekly wage and usually decrease in amount in direct proportion to increases in the number of hours worked in a week in excess of 40. The hourly rate purportedly paid under such a scheme is artificially low, and the difference between the wages paid at the hourly rate and the fixed weekly compensation is labeled a percentage of wage “bonus.”

Example:An employer's wage records show an hourly rate of $5.62 per hour, and an overtime rate of one and one-half times that amount, or $8.43 per hour. In addition, the employer pays an alleged percentage of wage bonus on which no additional overtime compensation is paid:
Week 1 - 40 hours worked:
40 hours at $5.62 per hour$224.80
Percentage of total earnings bonus at 33.45% of $224.8075.20
Total300.00
Week 2 - 43 hours worked:
40 hours at $5.62 per hour224.80
3 hours at $8.43 per hour25.29
Subtotal250.09
Percentage of total earnings bonus at 19.96% of $250.0949.91
Total300.00
Week 3 - 48 hours worked:
40 hours at $5.62 per hour224.80
8 hours at $8.43 per hour67.44
Subtotal292.24
Percentage of total earnings bonus at 2.66% of $292.247.76
Total300.00
This employee is in fact being paid no overtime compensation at all. The records in fact reveal that the employer pays exactly $300 per week, no matter how many hours the employee works. The employee's regular rate is $300 divided by the number of hours worked in the particular week, and his overtime compensation due must be computed as shown in § 778.114.
[46 FR 7319, Jan. 23, 1981]