Must bonuses be included in overtime pay calculations?

Nondiscretionary bonuses must be included, while discretionary bonuses may generally be excluded.

Nondiscretionary bonuses are bonuses that the employer is obligated to pay, and they must be included in overtime pay calculations. Examples of nondiscretionary bonuses include bonuses promised in an agreement (such as an employment contract or collective bargaining agreement), bonuses tied to performance evaluations, incentive plan bonuses, or any bonuses based on a set criteria for an employee, a group or an entire company. Nondiscretionary bonuses also include service anniversary bonuses, attendance bonuses, bonuses tied to working undesirable shifts (sometimes in the form of shift differentials), production-oriented bonuses and retention bonuses.

Discretionary bonuses are not considered overtime-eligible, as defined in FLSA 29 CFR 778.208-215. To be considered a discretionary bonus, all four criteria must apply:

• The employer retains discretion whether bonus will be paid.
• The employer retains discretion on the amount of the bonus.
• The employer retains discretion about whether a bonus will be provided very near the time frame it covers.
• The bonus must not be paid pursuant to any prior contract, agreement or promise.

Examples of discretionary bonuses employers may be able to exclude from overtime pay are holiday or gift bonuses, spontaneous bonuses (sometimes referred to as "spot" awards) and percentage of total earnings bonuses (bonuses based on total compensation earned during a specific time frame).

Employer actions can cause these types of bonuses to lose discretionary status. For example, an employer that announces in the first quarter that it will pay a holiday bonus in the third quarter may have transformed an otherwise discretionary bonus into a nondiscretionary one because there is now a promise to provide a bonus.

Employers may generally exclude contributions made to bona fide profit-sharing plans, trusts, or bona fide thrift or savings plans from overtime pay calculations.

An update to the FLSA definition of regular rate, effective January 15, 2020, allows employers to also exclude certain sign-on and longevity bonuses.

The calculation of bonuses required to be included in overtime pay is explained in 29 C.F.R. § 778.209, and instructions with examples are provided in the SHRM How-to Guide: How to Calculate Bonuses into a Regular Rate of Pay for Overtime Purposes.

Employers should also keep in mind that bonus payments cannot be used as a credit toward overtime.