Getting Punished for Trying to do Good: The Lesson in the Quik Trip Fine

by Michael Haberman on July 28, 2009 · 6 comments


QuikTrip, a Tulsa, Oklahoma based convenience store chain, has agreed to pay out $750,000 in overtime payments that the U.S. DOL said were due employees because of a violation of the Fair Labor Standards Act. By just looking at the headline you might think this is the “standard” case of a company working employees off the clock or not counting time they worked. Well if you thought that you would be very wrong. This case has to do with a company trying to do good things for their employees and rewarding them for their good work.

QuikTrip has a bonus system based upon a secret shopper program. Employees are rewarded for extra good work based upon their ratings in the program. What an excellent thing to do! However, QuikTrip got caught in a making a mistake that many companies probably don’t even realize they could make too. In fact when I talk about this in the SHRM prep classes I teach most people are agast. The mistake that QuikTrip made was in giving nonexempt employees non-discretionary bonuses! Because if you give nonexempt employees non-discretionary bonuses you have to use that in your overtime calculation for the period of time that was covered by the bonus.

This 2003 article, entitled Intersection of Bonuses and FLSA – Is More Overtime Pay Due?, written by Jason Reisman of the law firm Obermayer Rebman Maxwell & Hippel, explains that “The FLSA requires that non-discretionary bonuses – those promised to employees – be allocated over the time period to which they apply and included in calculating the overtime pay due to non-exempt employees. Such a bonus, viewed under the FLSA as additional compensation for employees’ work, requires additional overtime pay beyond the employees’ regular overtime pay rate, which is one and one-half times their regular hourly rate of pay. Non-discretionary bonuses that are not paid on a weekly basis require allocation to each workweek covered by the bonus before recalculating the overtime compensation due. Generally, non-discretionary bonuses include attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, and retention bonuses.” (For further information click on the link above.)

Discretionary bonuses do not require such payment, but may have consequences beyond just the simple payment of the bonus. To avoid problems Reisman suggests either of the following in constructing a bonus program for nonexempt employees.

  1. True discretion – both the language of the bonus plan and the actual administration of the plan must demonstrate “discretion.”
  2. A percentage of total earnings (both straight time and overtime) payout. As to the latter option, instead of a lump sum payment, the FLSA authorizes employers to pay a “percentage bonus” because it automatically includes an allowance for overtime pay as well as for straight time pay. The percentage bonus tool can be a silver bullet to effect compliance with the FLSA overtime provisions, while leaving intact the non-discretionary format of the bonus. However, a percentage bonus still requires advance planning, as it may have associated side effects, such as causing the employer to make different bonus payouts for similarly situated employees who earn different amounts of money, by virtue of different pay rates or working different hours.

Or you just don’t pay ANY bonuses to nonexempt employees! Overtime problem solved! But wait that certainly does not get you in the direction you want to go in with having committed employees whom you want to reward for helping the company be successful. So careful design and understanding and guidance needs to go into each bonus program you design. Realize the cost of the bonus is going to be greater than the actual bonus designation. And if you don’t have someone on your HR staff qualified to do this then get a good compensation consultant to help you. It will be a whole lot cheaper than paying $750,000 in back pay. QuikTrip got burned trying to do something good you need to avoid the same happening to you.

I would like for some of my compensation buddies to weigh in on this and perhaps offer some additional advice. Ann? Phil? Folks at Compensation Cafe?

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{ 6 comments… read them below or add one }

Anonymous July 28, 2009 at 10:10 am

I am glad you brought up this topic in your class. Our company had the same issue when we tried to give quarterly bonuses to our non-exempt technicians. I was able to advise them how to handle over-time payment.

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Ann Bares July 28, 2009 at 10:11 am

Mike:

Great post! Too few HR folks are aware of the FLSA regulations with respect to the payment of bonuses to nonexempt employees. As you point out, it is a frustrating obstacle for you and I and any employers who want to do the right thing by engaging employees in improving the business AND then sharing the rewards of that improvement with them. To my mind, it is one of those laws that was developed with good intentions (i.e. trying to "protect" employees from employers who would attempt to divert part of their wages into "at risk" compensation as a mechanism to avoid paying overtime), but in practice actually has the frequent effect of preventing nonexempt employees from participating in variable pay programs (an opportunity to build wealth through helping improve the business). Employers don't want to deal with the hassle necessary for compliance, so they simply remove these employees from incentive plan participation.

Michael Moore and I collaborated on this topic awhile back at Compensation Force and his blog … here is the link

http://compforce.typepad.com/compensation_force/2008/06/know-ye-the-reg.html

I will also see if I can get some of my Compensation Cafe co-horts to weigh in … they may have different perspectives and information than me!

Thanks again for calling attention to this!

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Betty July 28, 2009 at 3:01 pm

Excellent post. The complicated nature of compensation systems creation should be addressed in partnership with experienced counsel and/or compensation consultants. My experience with representing employers before DOL (and on this very issue) is that one must employ cooperative advocacy. DOL usually goes after companies who refuse to work to resolve a problem. I would love to hear the procedural history of this case.

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Doug Sayed July 28, 2009 at 11:14 pm

way to go Mike. This is a little known and discussed fact. Another example of of government regulation run amuck.

Most employers aren't aware of this, and when I've told companies about this, most are shocked, and so don't even believe me(because it's so darn backwards!).

Thanks for the warning. You've probably already saved a few butts!

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Trish McFarlane July 29, 2009 at 10:17 am

Mike- I enjoyed your post. Always great to refresh our knowledge of FLSA.

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Ann Bares July 31, 2009 at 3:14 pm

Mike:

We've chosen this post to highlight as our Friday Special at the Compensation Cafe …

http://compforce.typepad.com/compensation_cafe/2009/07/friday-special-at-the-cafe-4.html

Cheers!

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