A newly issued U.S. Department of Labor Wage and Hour Division (DOL) opinion letter makes clear that an incentive bonus, awarded automatically when employees satisfy predetermined criteria, is not discretionary and must be included in the regular rate of pay for overtime calculations. The determination rests on the Fair Labor Standards Act (FLSA) and the nature of the bonus itself. 

The Facts 

According to the facts outlined in the opinion letter, the bonus plan developed by the employer pays its hourly drivers a base wage and additional “Safety, Job Duties, and Performance” bonuses defined by predetermined criteria and formulas communicated to employees in advance. The bonuses apply to all hours worked in the pay period when earned. However, the employer states in the letter that it excludes the bonuses when calculating employees’ regular rate of pay for overtime, using only the base hourly wage instead. 

The Law 

Under the FLSA,i a bonus may be excluded from the regular rate only if all of the follow requirements are met: 

• The employer retains sole discretion over whether to pay the bonus and in what amount at or near the end of the period; 

• The bonus is not promised or expected; and 

• The payment is not tied to prior contracts, agreements, or promises. 

The Opinion 

The DOL found that these crucial requirements were not met because the bonus was determined by a set plan that used measurable factors like punctuality, completion of safety tasks, and job performance. Since meeting these criteria automatically results in a specific bonus amount, the employer no longer has discretion over whether to pay the bonus or how much to pay. Additionally, employees were informed of the criteria in advance, so they knew what was expected, which further indicated that the bonus was nondiscretionary. Lastly, since the employer’s bonus rewards safety compliance, attendance, and job performance, it was designed to induce desired behavior, further solidifying is nondiscretionary nature. 

As a result, because the bonus did not meet the statutory requirements for exclusion, it should have been included in the regular rate of pay calculation. 

What Does it Mean 

The DOL’s opinion letter emphasizes that overtime premiums must reflect one-half an employee’s regular rate of pay for the relevant workweek, which includes all nondiscretionary bonuses earned that week. 

When the employer calculates overtime based solely on the regular hourly wage, they end up underpaying the required overtime, resulting in payments that fall short of federal law requirements. 

Similarly, in California, non-discretionary bonuses must also be included when calculating the regular rate of pay for overtime purposes. California requires that overtime pay be one and a half or, as applicable, two times the employee’s regular rate, which means that all earnings, including applicable bonuses, must be factored into the overtime calculation.