8.7

Substance over labels

Why a payment's label never decides its treatment

Every payment structure this book has worked through — the salary tested in Chapter 2, the regular rate built in Chapter 7, the bonuses sorted into discretionary and nondiscretionary in § 7.6, the artificial schemes flagged in § 7.7 — resolves to the same final test. The Act does not ask what an employer calls a payment; it asks what the payment actually is and how it is actually computed. § 778.502(a) states the rule for the word that causes the most trouble: “bonus” properly names a sum paid as an addition to total wages, usually for extra effort, loyal service, or as a gift. The label is improperly applied when it is used to designate a portion of regular wages the employee is already entitled to receive under the regular wage contract (the agreement that already entitles the employee to those wages). Calling a payment a bonus does not make it one.

The source text works this out with arithmetic rather than argument. An employer agrees to pay $300 a week regardless of hours worked. The regular rate is that $300 divided by the hours actually worked each week, exactly as § 7.1 established. If the employer instead breaks the same $300 into an hourly rate for the first 40 hours, an overtime rate, and a shrinking “bonus” that vanishes once the employee works 55 hours or more, nothing about the employee's pay has changed — only the bookkeeping has. The gap is concrete: in a 45-hour week, the employer's books show 40 hours at $4.80 an hour ($192) plus 5 hours at $7.20 an hour ($36), for $228 in labeled “wages,” plus the remaining $72 labeled “bonus” to reach the guaranteed $300. Dividing that $72 “bonus” by the 45 hours worked and paying half of the resulting increase for the 5 overtime hours adds $4 more — a total of $304. The employee's actual regular rate on the guaranteed $300, however, works out to $6.67 an hour and $316.85 owed. Recomputing overtime on the “bonus” by prorating it back over the workweek — spreading the labeled amount evenly across the hours worked to compute a diluted hourly increase — does not fix this, because the bonus was never real — it was regular wages wearing a different name.

The same substance-over-labels test reaches piece-rate pay and percentage plans. An employer who assigns a piece-rate employee an arbitrary hourly rate and promises to make up any shortfall against actual piece earnings as a “bonus” is, in substance, paying a piece rate — the regular rate is piece earnings divided by hours worked, bonus label or not. A true percentage-of-earnings plan can lawfully satisfy overtime if it is agreed in advance and pays a genuine, unconditional percentage of both straight-time and overtime earnings alike — the source text's own example uses a rate of 10 percent, but any genuine unconditional percentage satisfies the test; it becomes unlawful the moment it is used, as § 7.7 covered, as a device to evade the overtime requirement rather than to pay it. The general rule that closes this chapter: wherever an employee is guaranteed a fixed or determinable sum as wages each week, no part of that sum is a true bonus, whatever the pay stub calls it.

Key terms

true bonusregular wage contractguaranteed fixed sumpiece-rate basisdevice to evade the overtime requirements