Overtime pay for nonexempt employees isn't always as simple as multiplying a worker's hourly wage by hours worked. Certain types of bonuses can effectively increase an employee's regular rate of pay, which in turn effects how an employer must calculate their overtime earnings. Whether a bonus affects overtime depends on how it's classified under the Fair Labor Standards Act.
Bonuses fall into two categories: discretionary and nondiscretionary. Discretionary bonuses are given entirely at the employer's choice, without prior promise or expectation; these do not affect overtime calculations. Examples of discretionary bonuses include holiday bonuses, gift bonuses and spontaneous bonuses (also called spot awards).
Nondiscretionary bonuses are those that an employer promises in advance, sometimes through a contract, a collective bargaining agreement or a company policy. These bonuses are used to encourage
efficiency, accuracy or quality work; they may also be used to motivate attendance or promote retention. In other words, if a bonus is structured in a way that causes employees to expect to
receive it based on their work, it is considered nondiscretionary and must be factored into overtime pay.
Examples of nondiscretionary bonuses, which may be set for individuals, teams or the whole company, include:
- Incentives tied to performance evaluations
- Rewards for meeting production goals or work quality standards
- Service anniversary awards
- Shift differentials tied to working undesirable hours
- Bonuses based on a percentage of total earnings
Calculating overtime with bonuses
If a bonus is nondiscretionary, it must be spread over the period it covers to determine its effect on overtime pay.
For a nondiscretionary bonus earned in a single workweek:
- Add the bonus to the employee's total wages for that week.
- Divide the total by the number of hours worked to get the new regular rate.
- Use this rate to calculate overtime pay.
For a bonus covering multiple weeks, the bonus amount must be divided among the workweeks it applies to and factored into each week's regular rate before determining overtime.
Be mindful that employer actions can turn a discretionary bonus into a nondiscretionary one. For example, announcing in advance that employees will receive a holiday bonus can create an expectation, making it nondiscretionary.
Some bonuses, such as those to profit-sharing or savings plans, are generally excluded from overtime calculations. Sign-on and longevity bonuses are typically considered discretionary.
State laws may have different overtime rules, especially for flat-sum bonuses. For example, California has stricter requirements. Always check state and local laws to ensure compliance.
Review your pay practices regularly to confirm that overtime is calculated correctly and bonuses are classified appropriately.