In order to encourage employees to be vaccinated, some of the largest employers in the country are offering cash bonuses for employees who get COVID-19 vaccines. One implication of these cash bonuses is that they may need to be included in the employee’s regular rate, thereby potentially increasing the employees’ liability for overtime pay.

Calculating Overtime Pay

Under 29 U.S.C. §207(a), overtime pay must be computed as time and a half the employee’s regular rate. The regular rate is an hourly rate computed by dividing the employee’s total compensation, minus overtime premium pay and other exclusions authorized by section 207(e) of the Fair Labor Standards Act (FLSA), by the employee’s total number of hours worked for the week.1

Including COVID-19 vaccination bonuses in the employee’s total compensation increases the employee’s regular rate, and therefore increases the employer’s overtime pay liability. If the employer pays overtime pay using a different method, such as using the rate for the type of work performed as authorized by §207(g)(2) of the FLSA, it still must compute and pay overtime pay on all forms of additional compensation that must be included in computing the regular rate.2 Violation of §207(g)(ii) by failing to pay overtime pay on additional compensation that must be included in the regular rate results in the employer having to use the regular rate method to compute its employees’ overtime pay.3

Compensation, Remuneration, and Computing Regular Rate

Whether a payment must be included in total compensation used to compute the regular rate is analyzed in two steps under section 207(e) of the FLSA.

First, it must be determined whether the payment is remuneration for employment.

Second, if a payment is remuneration for employment, then it must be included in the regular rate, unless it falls under one or more exceptions recognized under §207(e)(1) through (7).

Payments to employees to encourage off-duty conduct that enhances the employee’s job performance constitute remuneration for employment that may need to be included in the regular rate.4

Similarly, while the employees themselves no doubt benefit from COVID-19 vaccination, having vaccinated employees benefits the employer by improving employee availability for work, decreasing the risk for super-spreading events that may shut down its business, and makes the employer’s place of business safer and more inviting for the employer’s customers and clients. Bonuses for completing COVID-19 vaccinations therefore likely constitute remuneration for employment.

Exceptions

One of the seven exceptions recognized by §207(e) directly addresses employee bonuses.

Bonuses must be included in the regular rate unless they are discretionary, so that neither the fact that the bonus will be paid nor the amount of the bonus payment are determined until at or near the end of the time period during which the bonus was earned.5

Bonuses do not fall under this exception once the employer makes promises that cause the employees to expect the payments regularly.6 COVID-19 vaccination bonuses do not fall under this exception when both the fact of payment and its amount are announced to the employee, so that the employee can expect to receive the bonuses once they present their proof of vaccination to their employer.

Some employers will no doubt argue that the more general exception recognized by §207(e)(2) applies to COVID-19 vaccination bonuses. This exception applies to payments to employees for time not worked (such as vacation and holiday pay), reimbursement of expenses for the employer’s benefit, and other similar payments that are not made as compensation for hours of employment.

However, that Congress enacted a specific exemption for bonuses makes it unlikely that Congress also intended to apply the catch-all provision of §207(e)(2) to bonuses that do not qualify for exemption under §207(e)(3).7

While 29 C.F.R. §778.224 contains a list of “other similar payments” that can be excluded from the regular rate under §207(e)(2), none of the listed payments resemble a COVID-19 vaccination bonus. The closest is the cost to the employer of providing wellness programs.8

However, the COVID-19 vaccination bonus is an incentive payment to encourage the employees to become vaccinated, rather than the costs to the employer of administering a vaccination program.

Defining ‘Regular Rate’

Because DWD §274.03, like §207(a)(1) of the FLSA, requires computing overtime pay using the regular rate, but does not supply a separate definition for “regular rate,” the regular rate likely has the same meaning under the FLSA and Wisconsin law. If COVID-19 vaccination bonuses must be included in the regular rate under the FLSA, then it also must be included in the regular rate under DWD §274.03.

Avoiding Overtime Liability

There are two potential things the employer can do to avoid liability.

First, bona fide payments to employees for time lost as a result of completing COVID-19 vaccinations, just like other loss time payments such as vacation and holiday pay, likely qualifies for exemption under §207(e)(2). An employer that offers lost-time payments rather than a cash incentive to encourage employees to become vaccinated likely will not face additional overtime liability.

Second, a bonus that is earned during a single week is only included in computing the regular rate for the workweek during which the bonus was earned.9 An employer therefore can also avoid liability by not scheduling the employee for any overtime work during the week(s) that the vaccination bonus was earned.

This article was originally published on the State Bar of Wisconsin’s Labor & Employment Law Section Blog. Visit the State Bar sections or the Labor & Employment Law Section webpages to learn more about the benefits of section membership.

Endnotes

1 29 C.F.R. §778.109.

2 29 U.S.C. §207(g)(ii).

3 29 C.F.R. §778.417(b).

4 Featsent v. City of Youngstown, 70 F. 3d 904, 905 (6th Cir. 1995) (Bonuses paid to police officers for holding education degrees must be included in the regular rate when the bonuses were paid because the employer believed educational advancement would improve the employees’ job performance); Carabello v. City of Chicago, 969 F. Supp. 2d 1008, 1017 (N.D. IL. 2013) (Bonuses paid to paramedics for performing the service of passing a voluntary, off-duty fitness test must be included in the regular rate).

5 29 U.S.C. §207(e)(3).

6 29 U.S.C. §207(e)(3).

7 Flores v. City of San Gabriel, 824 F. 3d 890, 900-901 (9th Cir. 2016) (The enactment of a separate exemption for fringe benefit payments provides insight into the intended scope of §207(e)(2), so that cash fringe benefit payments do not qualify for exemption under §207(e)(2)); Reich v. Interstate Brands Corp., 57 F. 3d 574, 578 (7th Cir. 1995) (“We hesitate to read §207(e)(2) as a catch-all that that obliterates the qualifications and limitations of the other subsections of (§207(e)).

8 29 C.F.R. §778.224(4).

9 29 C.F.R. §778.209(a).