Bonuses, the FLSA and Henry Ford

Posted: Updated:

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.

After implementing the bonus, Mr. Ford’s turnover dropped from 370% to 16%. 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.

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 David Carr, Tami Earnhart, 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. 

  • Perspectives

    • Overseas Outsourcing Can Create a World of Problems

      The internet broke down geographic barriers for businesses, making it possible to find lower-cost suppliers around the world. But if companies lack the knowledge and skills to manage those suppliers properly, they may end up spending far more than expected. We’ve worked with companies all over the globe to help our clients meet their advertising and marketing objectives while protecting their budgets. While most of those working relationships have been positive, we’ve had...
    More

Events



  • Most Popular Stories

    • Money magazine judges Fishers as 3rd best place to live in the U.S.

      Fishers Makes Top 10 List of 'Best Places to Live'

      Three communities in Indiana made the top 100 list of best places to live in the country, but only one made the top 10. Fishers was judged by Money magazine as the third best place to live in the United States, behind Clarksville, Tennessee and Round Rock, Texas.

    • New study reveals best place in Indiana for young families

      And the Best Place for Young Families Goes To...

      What do you look for in a community when deciding where to start a family and raise your children? There can be several factors to weigh in making a sound decision. Housing affordability. Unemployment rates. Quality of education. Mortage website Lendingtree.com has released the results of a study pointing to the best places for young families in Indiana.

    • ‘Potential’ Fueling Downtown Makeover in Fort Wayne

      As Fort Wayne prepares to christen its latest big downtown project, Mayor Tom Henry says there are no signs of transformational development slowing down in the state’s second largest city. The Landing, a $34 million downtown redevelopment project, is expected to officially open soon, one of an estimated 14 projects that Henry says can help Fort Wayne become a destination city. Since the opening of Parkview Field more than a decade ago, Henry says momentum has...

    • SupplyKick CEO to Run for Governor

      The chief executive officer of Indianapolis-based tech company SupplyKick has announced plans to run for the Democratic nomination for governor. Shelbyville native Josh Owens says he will focus on issues such as increasing teacher pay, along with accessibility and affordability of life-long learning for all Hoosiers.

    • 120WaterAudit Lands $7M in Funding

      Zionsville-based 120WaterAudit LLC has closed on a $7 million Series A round of funding. The company says it plans to use the funding to enhance its digital water cloud platform and expand sales and marketing efforts. The funding round was led by Indianapolis-based HG Ventures, with participation from Allos Ventures in Indy and California-based Greenhouse Capital Partners. 120WaterAudit's platform includes software and testing kits to help government agencies, public...