It’s Q1, which for many employers means it is time to pay out employee bonuses. Bonus payments can drive morale and reward great performance. But it is important to remember that payment of non-discretionary bonuses can impact overtime payments for non-exempt employees.

This past Monday, January 5, the Department of Labor issued an opinion letter clarifying that certain non-discretionary bonuses are factored into the regular rate of pay when determining non-exempt employee overtime compensation.

To be discretionary (and therefore not included in the regular rate) under section 7(e)(3) of the Fair Labor Standards Act, the “fact of payment” and the “amount of payment” must be determined in the employer’s sole discretion “at or near the end of the period” when the work was performed.

The letter reminds employers that plans that offer and calculate bonuses “using a predetermined plan to incentivize certain work performance” and “automatically” trigger “upon meeting the criteria” are not discretionary, because the fact and amount of the payments are set before any employee performance. The letter specifically opines that an employer incentive plan that rewards employee drivers for demonstrating specific performance attributes such as “punctuality, attendance, [and] consistency” is not a discretionary bonus and must have be included in calculating the regular rate of pay.

This letter also analyzes the proper way to incorporate non-discretionary bonuses into the calculation of the overtime premium. As a reminder, to calculate the regular rate, the employer must divide the straight-time earnings by the total hours worked in a given week. The overtime rate is half of the resulting figure. As an example, if an employee works 50 hours at $12.00 an hour and earns an extra $5.60 per hour as a nondiscretionary bonus every hour, their straight-time earnings are $880.00. The regular rate of pay is therefore $17.60 per hour, meaning the overtime rate for each hour worked is $8.80 and the total compensation owed is $968.00. If a nondiscretionary bonus is paid to a non-exempt employee after the conclusion of the year, based on performance for the year, the bonus compensation must now be applied to any overtime week during the year, and the additional resulting overtime premium must be paid.

Employers should remember to consider these rules and requirements when designing and announcing their incentive programs and should speak with counsel before doing so.

You can read the full text of the opinion letter here: Microsoft Word – FLSA2026-2 (Public).docx.