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 * Fact Sheet #56C: Bonuses under the Fair Labor Standards Act (FLSA)







Print Fact Sheet

WAGE AND HOUR DIVISION

UNITED STATES DEPARTMENT OF LABOR


FACT SHEET #56C: BONUSES UNDER THE FAIR LABOR STANDARDS ACT (FLSA)

December 2019

This fact sheet provides general information regarding bonuses and the regular
rate of pay under the FLSA for non-exempt employees.  For information regarding
nondiscretionary bonuses and employees employed as executive, administrative,
professional, or outside sales employees, who are exempt from the FLSA’s minimum
wage and overtime requirements, see Fact Sheet #17U.

 The FLSA requires that most employees in the United States be paid at least the
federal minimum wage for all hours worked and overtime pay at not less than time
and one-half the regular rate of pay for all hours worked over 40 hours in a
workweek.  Fact Sheet #22 provides general information about determining hours
worked. 

The amount of overtime pay due to an employee is based on the employee’s regular
rate of pay and the number of hours worked in a workweek regardless of whether
the employee is paid on a piece rate, day rate, commission, or a salary basis.
 Fact Sheet #23 provides additional information regarding overtime pay.

A bonus is a payment made in addition to the employee’s regular earnings.  Under
the FLSA, all compensation for hours worked, services rendered, or performance
is included in the regular rate of pay.  The Act provides an exhaustive list of
payments that may be excluded from the regular rate of pay.  Specifically, 29
U.S.C. §§ 207(e)(1) and (3) contain statutory provisions which address the
excludability of certain bonuses.  Unless specifically noted, payments that are
excluded from the regular rate may not be credited towards overtime compensation
due under the FLSA.  Information regarding additional exclusions from the
regular rate is available in Fact Sheet #56A.


DISCRETIONARY BONUSES

Discretionary bonuses are excludable from the regular rate of pay.  A bonus is
discretionary only if all the statutory requirements 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. 

Examples of some common bonuses that may be excludable discretionary bonuses if
they meet the statutory requirements include:

 * 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).[1]

The label assigned to the bonus and the reason for the bonus do not conclusively
determine whether the bonus is discretionary.  While a bonus may be labeled
discretionary, if it does not comply with the provisions of the statute, then
the bonus is not an excludable discretionary bonus.  The determination must be
made on a case-by-case basis depending on the specific circumstances.

A discretionary bonus may not be credited towards overtime compensation due
under the FLSA.


NONDISCRETIONARY BONUSES

A nondiscretionary bonus is a bonus that fails to meet the statutory
requirements of a discretionary bonus.  Nondiscretionary bonuses are included in
the regular rate of pay, unless they qualify as excludable under another
statutory provision (see below). 

Examples of nondiscretionary bonuses that must be included in the regular rate
include:

 * 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).

Such bonuses are nondiscretionary because the employees know about and expect
the bonus.  The understanding of how an employee earns one may lead to an
expectation to receive the bonus regularly.  The fact that the employer has the
option not to pay the promised bonus does not make the bonus discretionary.


GIFTS AND PAYMENTS IN THE NATURE OF GIFTS ON SPECIAL OCCASIONS

Sums paid as gifts and payments in the nature of gifts made on holidays or on
other special occasions as a reward for service may be excluded from the regular
rate, provided the amounts of the gifts (or payments) are not measured by or
dependent on hours worked, production, or efficiency. 

Certain longevity bonuses are excludable from the regular rate as gifts when
given as a reward for service or tenure and provided the bonus payments are not
made pursuant to a collective bargaining agreement or a city ordinance or
policy.[2]

Sign-on bonuses given to employees with or without clawback provisions may be
excluded as gifts or may be excluded under 29 U.S.C. § 207(e)(2) as other
payments that are not compensation for hours of employment, or otherwise tied to
quality or quantity of work performed. However, sign-on bonuses paid pursuant to
a CBA, ordinance, or policy with a clawback provision may not be excluded as a
gift and must be included in the regular rate.


CALCULATING OVERTIME PAY BASED ON THE REGULAR RATE

Overtime pay is calculated based only on payments to the employee that are
required to be included in the regular rate of pay. The following steps can be
used to calculate the regular rate of pay and overtime compensation due when the
employee is paid on an hourly, piece rate, day rate, job rate, commission, or
salary basis.

Step 1: Total compensation for the week (except the statutory exclusions) ÷
Total hours worked in the week = Regular Rate per hour for the week (must be at
least the federal minimum wage)

Step 2: Regular Rate x (.5) = Half-time premium for each overtime hour (note the
straight time for    the overtime hours is included in Step 1)

Step 3: Half-time premium pay rate x Overtime hours = Overtime compensation due


EXAMPLE A: NONDISCRETIONARY BONUS

A non-exempt employee is paid $10.00 per hour and receives a $50.00 bonus in a
particular week that was promised for helping to produce a special order for a
customer two weeks earlier than previously scheduled.  The employee worked 43
hours that week.  The following is an example of how to compute overtime pay
based on the employee’s regular rate:

            $10.00 per hour x 43hours = $430.00 (total compensation for straight
time)

            $430.00 + $50.00 (bonus) = $480.00 (total compensation)

            $480.00 ÷ 43 hours = $11.16 (regular rate)

            $11.16 x .5 = $5.58 (half time premium pay rate)

            $5.58 x 3 overtime hours = $16.74 (overtime pay due)

            $480.00 + $16.74 = $496.74. (total due)

 


EXAMPLE B: SHIFT DIFFERENTIAL PLUS NONDISCRETIONARY BONUS

A non-exempt employee is paid $15.00 per hour plus an evening shift differential
of $1.00 per hour for all hours worked during an evening shift.  The employee
worked 45 hours, 30 of which were during evening shifts, in a week.  The
employee also earned a $100.00 bonus that week that was promised for helping to
produce a special order for a customer two weeks earlier than previously
scheduled.  The following is an example of how to compute overtime pay based on
the employee’s regular rate:

            $15 per hour x 45 hours = $675 (compensation for straight time at
$15 hourly rate)

            $1.00 x 30 hours = $30 (shift differential for the evening shifts)

            $675 + $30 (shift differential) + $100 (bonus) = $805 (total
compensation)

            $805 ÷ 45 = $17.89 (regular rate)

            $17.89 x .5 = $8.95 (half time premium pay rate)

            $8.95 x 5 overtime hours = $44.75 (overtime pay due)

            $805 + $44.75 = $849.75 (total due)

 


EXAMPLE C: NONDISCRETIONARY BONUS AND AN EXCLUDABLE DISCRETIONARY BONUS

A non-exempt employee is paid $10.00 per hour and receives a $50.00 bonus that
was promised in a particular week for helping to produce a special order for a
customer two weeks earlier than previously scheduled.  The employee also
receives a $25.00 on-the-spot bonus that week (because it was not preannounced
to the employee, it is an excludable discretionary bonus).  The employee worked
43 hours that week.  The following is an example of how to compute overtime pay
based on the employee’s regular rate:

            $10.00 per hour x 43 hours = $430.00 (total compensation for
straight time)

            $430.00 + $50.00 (excludes $25.00 discretionary bonus) = $480.00
(total compensation)

            $480.00 ÷ 43 hours = $11.16 (regular rate)

            $11.16 x .5 = $5.58 (half time premium pay rate)

            $5.58 x 3 overtime hours = $16.74 (overtime pay due)

            $480.00 + $16.74 +$25.00 (discretionary bonus) = $521.74 (total due)


WHERE TO OBTAIN ADDITIONAL INFORMATION

For additional information, visit our Wage and Hour Division Website:
http://www.dol.gov/agencies/whd and/or call our toll-free information and
helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4USWAGE
(1-866-487-9243).

This publication is for general information and is not to be considered in the
same light as official statements of position contained in the regulations.

The contents of this document do not have the force and effect of law and are
not meant to bind the public in any way. This document is intended only to
provide clarity to the public regarding existing requirements under the law or
agency policies.

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