Bonuses, the FLSA and Henry Ford
Historians often talk about the radical idea of Henry Ford: The $5-a-day wage. This wage was about twice the going rate for manufacturing work at the time. Mr. Ford realized that it was cheaper to double wages than it was to keep up with the high cost of turnover in his workforce.
The truth is, though, that the $5-a-day wage wasn’t really $5 a day. The day’s wage was $2.34 and the other $2.66 was in the form of a bonus. And, many forget that the bonus was contingent upon the automaker’s internal review of the employees’ lifestyles to ensure that they were doing things the “American Way"—something that definitely wouldn’t pass legal muster today. But that would not be the only contemporary problem for the American Way bonus.
The impact of such a bonus on overtime rates wasn’t an issue for Mr. Ford as he pioneered the change in 1914, 24 years before the Fair Labor Standards Act. For this article, we won’t get into the details of the “American Way” bonus too deeply, but instead use the concept for FLSA-illustration purposes. So, let’s assume for a moment that the FLSA applied to an “American Way” bonus and see what happens.
Mr. Ford would have to include the bonus with other earnings to determine the “regular rate” upon which overtime pay must be based. Let’s say it was a weekly bonus, so the amount of the bonus would be added to the other earnings of the employee and the total divided by the total hours worked.
In those days, the “day” was typically 9 hours and the “workweek” was Monday through Saturday, as Mr. Ford didn’t introduce the 5-day, 40-hour week until 12 years later.
The “American Way” employee would be paid as follows:
$14.04 regular wages ($2.34 per day x 6 days)
$2.66 per day “American Way” Bonus = $15.96
Total earnings = $30 ÷ 54 hours (9 hours per day) = $.56/hr.
14 hours of overtime x $.28 overtime premium = $3.92.
Total weekly pay = $30 + $3.92 = $33.92--a 13% FLSA increase!
If the bonus was paid over a period longer than a workweek, Mr. Ford would have to wait to calculate the impact of the bonus until the conclusion of the bonus period. The bonus would then have to be apportioned back over the workweeks of the bonus period. Then, the employee would have to receive an additional amount of overtime compensation for each workweek that he or she worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week, then multiplied by the number of statutory overtime hours worked during the week.
This is a calculation that can
be done, but it has to factor in multiple workweeks that may have varying amounts of overtime. It’s not impossible, but it’s not the most fun for non-math majors.
The simplest way Mr. Ford could have done it and still complied with the FLSA was to announce a flat percentage bonus for the “American Way.” This is where the bonus payment would be a flat percentage of the employee’s straight-time earnings and
overtime earnings. In Mr. Ford’s case, it would have been a very generous bonus, but no recalculation of the regular rate would be required, as the bonus would be paid based upon both straight time and overtime earnings.
After implementing the bonus, Mr. Ford’s turnover dropped from 370% to 16%. Mr. Ford knew that incentivizing his workforce with fair compensation was a good business strategy, but of course Mr. Ford did not have to worry about compliance with the FLSA. Employers now do, but can easily set up bonus plans that comply. Contact Paul Bittner
or an Ice Miller employment attorney
for more information on how.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.