The Overtime Trap Hiding in Your Bonus Plan and Time Clock

Does your business have creative pay practices to incentivize employees, such as perfect attendance bonuses, shift differentials or referral bonuses? Does your time clock round punches or make automatic adjustments to them? If so, you may be at risk of a growing wave of class action lawsuits.

Wage and hour class and collective actions are becoming increasingly common. The mistakes show up in payroll records, and a few dollars per employee per week adds up quickly across a workforce and up to three years of back pay. Federal law can then double the unpaid amount and require the employer to pay the employees' attorney fees.

We often tell clients that the Fair Labor Standards Act (FLSA) is complicated enough that compliance problems are common. Even the US Department of Labor (DOL), the agency that writes and enforces the federal wage-and-hour rules, has gotten it wrong. In 2016 it paid $7 million to settle a lawsuit brought by its own employees' union over unpaid overtime, off-the-clock work, and misclassified employees.

In 2025 alone, employers paid $418 million to settle 337 FLSA collective actions. More than 40 of those settlements topped $2 million each, and the largest approached $56 million. These issues arise throughout the country, including Michigan. For example, a northern Michigan employer agreed to pay up to $507,500 to about 1,400 employees over how it calculated overtime.

What Is the "Regular Rate"?

Overtime must be paid at one and one-half times an employee's "regular rate of pay." Many employers assume that means the employee's base hourly wage. It usually does not. The regular rate includes almost everything the employee earns that week, including shift differentials and most bonuses.

Consider an employee who earns $20 an hour, works 45 hours and receives a $50 perfect attendance bonus.

• The common mistake. Payroll pays $800 for 40 hours, $150 for 5 overtime hours at $30, and the $50 bonus, for a total of $1,000.
• The correct way. Add the hourly pay and the bonus ($900 + $50 = $950) and divide by all hours worked (45). The regular rate is $21.11, not $20. Each overtime hour is owed an extra half of that rate, so the correct total is $1,002.78.

The difference is only $2.78 for that one employee for one week. If 500 employees worked that schedule every week for three years, the back pay would exceed $215,000. Liquidated damages could double that figure before the plaintiffs' attorney fees are added.

There are exceptions. Truly discretionary bonuses can be left out, meaning the employer decides at the end of the period whether to pay and how much. Certain premium payments can also be left out, such as daily overtime paid under a union contract or state law, or premium pay of at least time and a half for working a sixth or seventh day, a weekend or a holiday. These exceptions are narrow, and each comes with conditions that are easy to miss.

Bonuses paid quarterly or annually must also be spread back over the weeks they cover, with extra overtime paid for any of those weeks that included overtime.

Rounding Must Even Out

Getting the rate right is only one of the modern wage and hour compliance issues. Another concern for employers relates to time clock rounding and time clock adjustments.

Federal law allows employers to round time punches, such as to the nearest quarter hour, but only if rounding evens out over the course of time so employees are paid for all time worked (for example, a 5:07 p.m. punch-out is rounded down to 5:00, but a 5:08 punch-out is rounded up to 5:15). Plaintiffs now test that with the employer's own time clock data. In one case, the employees' expert found that a rounding policy that appeared neutral on paper shorted employees about 74,000 hours over six years, and a federal appeals court allowed the case to go forward.

Automatic adjustments raise the same concern. Examples include automatic meal break deductions, punches moved to the scheduled start time, and grace periods that only run in the employer's favor.

State law can be stricter. Michigan's wage rules require employers to record each day's hours to the nearest tenth of an hour (six minutes) or a finer measure, so quarter-hour rounding may not satisfy Michigan's standard. A practice that passes under federal law may still violate state law.

The Tip of the Iceberg

Regular rate and rounding claims are only two of the wage-and-hour issues plaintiffs' firms are pursuing. Other common claims include the following.

• Missed or interrupted meal and rest breaks in states that require them, such as California
• Off-the-clock work before and after shifts, such as security screenings, changing into protective gear, or starting up computers
• Salaried employees misclassified as exempt from overtime
• Workers paid as independent contractors who are legally employees
• Unpaid travel time between job sites

Michigan does not require breaks for adult employees, but employers that provide unpaid meal breaks must ensure employees are completely relieved of all job-related duties during them. Employers with workers in other states may also be subject to those states' break laws.

Butzel's Labor & Employment attorneys can review your pay practices and timekeeping under privilege before a plaintiffs' firm does. Contact the authors or your Butzel Long attorney to discuss a review.

Brett J. Miller
313.225.5316
millerbr@butzel.com

Blake Padget
248.258.1305
padget@butzel.com