Understanding Employee Bonuses: Discretionary vs. Non-Discretionary for Overtime Calculations
As the end of the year approaches, you may be thinking about bonus payments to reward employees for their contributions throughout the year. This is a common practice that can help boost employee morale by this show of appreciation and incentivize performance moving forward.
Bonuses can be broadly categorized into two types: discretionary and non-discretionary bonuses. Understanding the distinction between these two types, as well as their implications for overtime calculations, is crucial for both employers and employees who are classified as non-exempt.
Types of Bonuses
1. Discretionary Bonuses
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Definition: Discretionary bonuses are awarded at the employer’s discretion, often based on overall individual or company performance, and are not guaranteed. Examples include holiday bonuses, spot bonuses, or profit-sharing bonuses.
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Overtime Calculation: Since discretionary bonuses are not predetermined or expected, they are usually not included in the regular rate of pay and therefore are not included in any overtime calculations under the Fair Labor Standards Act (FLSA).
2. Non-Discretionary Bonuses
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Definition: Non-discretionary bonuses should be clearly spelled out in a company policy. They are predefined and typically tied to performance metrics, such as meeting sales targets or productivity goals. Examples include attendance bonuses and commissions.
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Overtime Calculation: Non-discretionary bonuses must be included in the regular rate of pay when calculating overtime. This means they are added to the employee’s base pay to determine the total earnings for the purposes of overtime calculations.
To calculate the overtime rate when non-discretionary bonuses are paid, employers should:
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Determine the total earnings for the pay period, including the non-discretionary bonus.
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Divide this total by the total hours worked in the pay period to find the regular rate.
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Use this regular rate when determining the base rate to use for overtime calculations in that workweek. Remember that overtime must be paid at 1.5 times the regular rate of pay for any hours worked over 40 in a single workweek.
Refer to this fact sheet for more information: https://www.dol.gov/agencies/whd/fact-sheets/56c-bonuses.
Always check your state laws to make sure you don’t have more stringent rules to follow and contact the HR Advice team for help. Don’t forget to enjoy the season yourself!
Frequently Asked Questions
What is the difference between a discretionary and non-discretionary bonus?
A discretionary bonus is one where the employer decides at their sole discretion whether to pay it, how much to pay, and when — and the decision is made near the time of payment with no prior promise. A non-discretionary bonus is one that employees have an expectation of receiving based on a formula, prior promise, or regular practice tied to productivity, attendance, retention, or other criteria.
Which bonuses must be included in the overtime regular rate calculation?
Under the FLSA, non-discretionary bonuses must be included in the employee’s regular rate of pay for overtime calculation purposes. This includes production bonuses, attendance bonuses, safety bonuses, quality bonuses, and any bonus employees have reason to expect as part of their compensation. Failing to include these is one of the most common FLSA violations employers face.
How do you calculate the overtime adjustment for a non-discretionary bonus?
Divide the bonus amount by the number of hours worked in the period to which the bonus applies to get the bonus rate per hour. Then multiply the bonus rate by 0.5 times the number of overtime hours worked during that period. Add this amount to the overtime pay already calculated. This is called the “half-time” adjustment method.
Are holiday bonuses considered discretionary?
Holiday bonuses can be discretionary if the employer makes the sole decision to pay them with no prior promise. However, if you pay a holiday bonus every year in a fixed amount or formula, employees develop an expectation that it will be paid, and courts may reclassify it as non-discretionary. Clearly communicate the discretionary nature of such bonuses in writing each time they are given.
What penalties can employers face for miscalculating overtime due to bonuses?
FLSA violations for overtime miscalculation can result in back wages, an equal amount in liquidated (double) damages, attorney’s fees, and a 2-year statute of limitations (3 years for willful violations). Department of Labor audits triggered by one complaint often result in recovery for all similarly situated employees — making this a class-action risk.
