CFR > Title 29 - Labor > SUBTITLE B—Regulations Relating to Labor > CHAPTER V—WAGE AND HOUR DIVISION, DEPARTMENT OF LABOR (parts 500 to 871) > SUBCHAPTER B—STATEMENTS OF GENERAL POLICY OR INTERPRETATION NOT DIRECTLY RELATED TO REGULATIONS (parts 775 to 794) > PART 778—OVERTIME COMPENSATION > SUBPART F—Pay Plans Which Circumvent the Act (§778.500 to §778.503) > 778.503—Pseudo “percentage bonuses.”

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.”

Code of Federal Regulations

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 $224.80 75.20
Total 300.00
Week 2—43 hours worked:
40 hours at $5.62 per hour 224.80
3 hours at $8.43 per hour 25.29
Subtotal 250.09
Percentage of total earnings bonus at 19.96% of $250.09 49.91
Total 300.00
Week 3—48 hours worked:
Code of Federal Regulations 435
40 hours at $5.62 per hour 224.80
8 hours at $8.43 per hour 67.44
Subtotal 292.24
Percentage of total earnings bonus at 2.66% of $292.24 7.76
Total 300.00
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 .

Code of Federal Regulations

[46 FR 7319, Jan. 23, 1981]