When Employee Bonuses Must Be Included in Overtime Calculations

The U.S. Department of Labor’s Wage and Hour Division Opinion Letter FLSA 2026-2 provides employers with guidance on a recurring topic — when employee bonuses impact an employee’s regular rate of pay and overtime pay. Employers offering attendance, safety, productivity, or other performance-based incentives to hourly employees should be aware that these payments affect an employee’s overtime pay.

The Bonus Program

The facts underlying the Department of Labor’s interpretation of the overtime rules involved an employer in the waste management industry paying its employees a base wage of $12 per hour. Employees could also earn additional compensation under a “Safety, Job Duties, and Performance” bonus program.

The program used specific criteria to determine whether an employee earned a bonus and the amount of the bonus. Among other things, the bonus program rewarded employees for punctuality, attendance, completion of safety-related tasks, and job performance. If earned, the bonus applied to all hours the employee worked during the applicable pay period. The employer did not include these incentive payments when calculating employees’ overtime premiums.

Assuming the employees were subject to the Fair Labor Standards Act’s (FLSA) overtime requirements (i.e., the employees did not qualify for an exemption from the FLSA minimum wage and overtime requirements) the Department of Labor concluded that the employer’s pay practice violated the FLSA.

The Regular Rate Includes More Than an Employee’s Hourly Wage

The FLSA requires that covered, non-exempt employees receive one and one-half of their regular rate of pay for all hours worked more than 40 hours in a work week. Though often the case, an employee’s hourly rate is not always an employee’s “regular rate” as defined by the FLSA. An employee’s regular rate, subject to some statutory exclusions, includes all compensation an employee receives for employment. Additional compensation such as commissions, shift differentials, and nondiscretionary bonuses may increase an employee’s regular rate and the employee’s corresponding overtime compensation.

When Is a Bonus “Discretionary” and Excluded from Regular Rate and Overtime Calculations?

The FLSA permits employers to exclude certain discretionary bonuses from the regular rate. A bonus is discretionary only when both:

  1. Whether to make the payment and the amount of the payment remain within the employer’s sole discretion until at or near the end of the period for which the employer pays the bonus; and
  2. The employer has not committed to paying the bonus pursuant to a prior contract, agreement, or promise causing employees to expect the payment.

The bonus program considered in the Department of Labor’s opinion letter did not satisfy these requirements. Although the employer retained discretion when it originally created the program, once it established predetermined criteria controlling employee bonus entitlement and formulas for calculating the bonus amount, the employer lost discretion to make the payment. As a result, the Department of Labor concluded that once an employee satisfied the program criteria, the employee earned the bonus, thus the bonus payment was nondiscretionary, became a part of the employee’s regular rate, and required additional overtime calculations.

In the opinion letter, the Department of Labor noted the fact that employees knew about the program in advance and that the employer intended the program to encourage a particular employee behavior and performance.

How a Non-Discretionary Bonus Changes the Overtime Calculation

Again, the FLSA requires that non-exempt employees receive one and one-half of their regular rate of pay for all hours worked in excess of 40 hours in a work week. An employer including a non-discretionary bonus into an employee’s regular rate necessarily increases an employee’s overtime rate. For example, an employee who earns $12 per hour, works 50 hours in a workweek and receives a $5.60-per-hour nondiscretionary bonus would have a regular rate of $17.60 per hour. Because the employee has already received the regular rate for all 50 hours worked, including the 10 overtime hours, the employer would owe an additional one-half of the regular rate — $8.80 — for each overtime hour, or $88 in additional overtime pay.”

While this example involves a bonus which was applicable to a single work week, the Department of Labor’s regulations address application of bonuses to longer periods, e.g., quarterly or annual bonuses.

The above calculation assumes that the employee is subject to the FLSA’s overtime requirement. If an employee qualifies for an exemption from the FLSA’s overtime requirement, the regular-rate overtime calculation addressed by the Department of Labor is not applicable.

Employer Considerations

This recent opinion letter does not announce a new rule. Instead, it is a reminder of the FLSA regular-rate principles. Employers should consider their obligations under the FLSA when making payments to non-exempt employees, especially if those payments are impacted by:

  • attendance or punctuality,
  • productivity or efficiency,
  • safety performance,
  • quality metrics,
  • completion of specified job duties, or
  • achievement of predetermined individual, team, or company goals.

The relevant inquiry is whether the employer retains genuine discretion over both whether to make the payment and the payment amount, at or near the end of the relevant period. When employers tell employees in advance of performing work that satisfying specified criteria will result in a calculable bonus, the bonus will ordinarily be nondiscretionary and therefore must be included in the regular rate. If the bonus payment is discretionary, the employer is not required to make additional overtime calculations or payments.

If you have a question about this opinion letter or other employment questions, contact Kevin P. Doyle at kdoyle@praywalker.com.