Bonuses & Calculating an Employee’s Regular Rate of Pay for Overtime

July 20, 2022 - Katherine Busbee

The Fair Labor Standards Act (FLSA) requires that non-exempt employees be paid no less than time and one-half their regular rate of pay for all hours worked over 40 hours in a workweek. How should an employer calculate an employee’s regular rate of pay? Under the FLSA, an employee’s regular rate of pay includes “all remuneration for employment paid to, or on behalf of, the employee,” less certain statutory exceptions. The regular rate is determined by adding the employee’s pay for the workweek and all other earnings and dividing the total by the number of hours the employee worked that week.

There are seven statutory exceptions that are not required to be included in the employee’s regular rate of pay:

Gifts and payments in the nature of gifts on special occasions;
Payments for occasional periods when no work is performed due to vacation, holidays, or illness; reimbursable business expenses; and other similar payments;
Discretionary bonuses;
Payments made pursuant to a bona fide profit-sharing plan;
Employer contributions to benefit plans;
Premium payments for non-FLSA overtime;
Any income derived from employer stock options, within certain parameters.

One of the most confusing exceptions for employers to apply is whether a bonus is discretionary and therefore excluded from the overtime pay calculation or non-discretionary, which must be included.

Under the FLSA, bonuses are discretionary if all of the following are met:

The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly.

Many employers have bonus programs based on efficiency levels or quotas, and they notify their employees of these incentives to drive production or sales. However, these bonuses likely do not qualify as “discretionary.” The FLSA states: “Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay.”

The Department of Labor Fact Sheet 56C gives the following examples of bonuses that likely qualify as discretionary vs. non-discretionary:

Discretionary (excluded from an employee’s regular rate of pay)

Bonuses for overcoming a challenging or stressful situation;
Bonuses to employees who made unique or extraordinary efforts not awarded according to pre-established criteria;
Employee-of-the-month bonuses;
Severance bonuses; and
Referral bonuses to employees not primarily engaged in recruiting activities (subject to additional criteria).

Non-Discretionary (required to be included in the employee’s regular rate of pay)

Bonuses based on a predetermined formula, such as individual or group production bonuses;
Bonuses for quality and accuracy of work;
Bonuses announced to employees to induce them to work more efficiently;
Attendance bonuses; and
Safety bonuses (i.e., number of days without safety incidents).

Fact Sheet 56C also has helpful examples on how to calculate an employee’s regular rate of pay when an employee receives a non-discretionary bonus.

If you have more questions on overtime pay calculations or specific questions about your company’s bonus structure, please reach out to Katie or a member of the HSB Employment Law practice team.