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!
