The latest plans to boost worker productivity may get companies in trouble with one of the oldest laws regulating labor relations. Philadelphia lawyer Gina Ameci, who represents the management side in labor relations, recently warned members of the American Society for Personnel Administration that they may be opening themselves up to tens of millions of dollars in wage claims because of the way they calculate overtime pay.
Under the Fair Labor Standards Act, first passed in 1938, companies must pay workers a 50 percent bonus for all hours worked above 40 per week. Virtually all managers know of this time-and-a-half requirement, and few try to blatantly ignore it. Nonetheless, "technical noncompliance with the overtime pay provisions are frequent because overtime pay is the most complicated aspect of the FLSA," Ameci says. The Labor Department bills companies for more than $60 million a year for overtime underpayments.
The confusion stems from how to figure the base pay that is to be multiplied by 1.5 for the overtime rate. And the problem is growing because of the new popularity of bonus schemes for good attendance and for high productivity -- schemes adopted to goad workers into helping keep costs down and U.S. factories competitive with overseas competition.
Those bonuses must be included in the base pay. That means not only must the overtime rate be higher than executives figured, but that the rate will vary week to week, depending on how an employe does in the attributes used to calculate the bonus. And the minimum overtime pay level will therefore also vary among workers.
If the bonus is computed for each pay period and included in the regular pay packet, then the overtime pay for that same period must be figured on the bonus-inflated rate and paid at the same time. But for many companies, the bonus plans are hinged on a variety of factors, and the bonuses worked out and paid as infrequently as once a quarter. In those cases, companies have to recalculate the base pay, and give additional checks for overtime premiums on that extra amount.
Ameci says this is all a surprise for many managers because they are used to paying bonuses and not having them impact on overtime rates. That's because the FLSA contains a list of seven kinds of premiums that do not have to be counted in base pay. They are gifts, Christmas bonuses, bonuses handed out at other special occasions, and payments made to employe accounts in profit-sharing plans, thrift plans, savings plans and trusts.
Beyond that specific list, a bonus is not part of base pay if it is discretionary -- in other words, if it is completely up to management whether there should be a bonus and, if so, how much it should be. But as soon as any sort of real promise is made to workers, the bonus is no longer discretionary, as far as the Labor Department is concerned. That's so even in situations where company officials think they have built in enough freedom to change their minds.
Of course, the whole idea of the new productivity bonus plans is to assure workers that their diligence will be rewarded. Companies want to reduce their discretion, so that line workers will see that their energies are directly connected with the success of the operation. If the measure has anything to do with staying on the job or turning out more product or operating more efficiently, the bonus clearly is not discretionary.
None of which is an argument for abandoning productivity bonuses. If they do the job of helping company profitability, they are too good a management tool to scuttle. But it does mean that the bonuses may cost more than companies orginally figured. That may lead some companies to take a second look at the size of the bonus.Moskowitz covers legal affairs for McGraw-Hill World News.