DOL Confirms Nondiscretionary Incentive Bonuses Must Be Included in the Regular Rate for Overtime

The U.S. Department of Labor’s Wage and Hour Division (DOL) recently issued Opinion Letter FLSA2026-2 confirming that incentive bonuses earned under a predetermined plan must be included in an employee’s “regular rate” when calculating overtime under the Fair Labor Standards Act (FLSA). This opinion reinforces that nondiscretionary bonuses—such as those for safety, attendance, and performance—are part of the regular rate and require corresponding overtime adjustments. Employers who exclude such bonuses from overtime calculations risk liability for underpayment.

The Bonus Plan at Issue

The request concerned a waste management employer who paid drivers $12.00 per hour and offered bonus compensation through a “Safety, Job Duties, and Performance” plan. Under this plan, employees could earn per-hour bonuses each pay period based on punctuality, attendance, safety tasks, driving compliance, proper attire, and efficiency, with a maximum bonus of $9.50 per hour. The employer calculated overtime using only the $12.00 base rate, excluding the bonus from the regular rate.

Legal Framework

The FLSA requires overtime pay of at least 1.5 times a nonexempt employee’s regular rate of pay for hours worked over 40 in a workweek. 29 U.S.C. §§ 206, 207(a)(1). The regular rate includes all remuneration for employment, subject to narrow exclusions. 29 U.S.C. § 207(e). The calculation of the regular rate is a matter of mathematical computation: divide straight‑time earnings actually paid by hours actually worked in the workweek. 29 C.F.R. § 778.109. The overtime premium is then calculated by dividing the regular rate in half and multiplying that amount by the number of overtime hours worked. 29 C.F.R. § 778.110. 

Section 7(e)(3) of the FLSA allows exclusion of a bonus only if the employer, at its sole discretion and at or near the end of the period, determines both the fact and amount of payment, and there is no prior promise or agreement. 29 U.S.C. § 207(e)(3). These payments are often called “discretionary” bonuses. See 29 C.F.R. § 778.211. Predetermined criteria and formulas eliminate discretion; therefore, the bonus payments must be included in the regular rate. Even if some criteria involve judgment (such as whether a vehicle was returned “clean”), variability does not convert a nondiscretionary plan into a discretionary one. 

Correct Calculation of Overtime 

Considering the employer’s request related to the bonus payments for its safety and performance standards, DOL concluded that bonuses awarded based on detailed, preannounced criteria and formulas, with employees informed of requirements in advance, are nondiscretionary and must be included in the regular rate. Employers may structure occasional bonuses to reward employees for safety protocols or performance targets. However, when a per‑hour bonus is not entirely discretionary and is earned for all hours in a workweek, it must be included in the regular rate, and the overtime premium is owed. DOL provided an illustrative example: 

“James earns a base hourly rate of $12.00 per hour and works a total of 50 hours in a workweek in which, based on the predetermined incentive terms, the employer pays an additional $5.60 per hour for all hours worked as a non-discretionary bonus. His total straight-time earnings are $880.00 ((50 hours × $12.00) + (50 hours × $5.60)). His regular rate for the workweek is therefore $17.60 ($880.00 ÷ 50 hours) and the half-time rate is $8.80 ($17.60 × 0.5). Thus, he is entitled to an additional $8.80 per hour for each overtime hour worked for a total overtime premium of $88.00 ($8.80 × 10 overtime hours), increasing his total wages to $968.00 ($880.00 (straight-time earnings for all hours worked) + $88.00 (half-time due for all hours worked over 40 per workweek)).”

Key Takeaways for Employers

• Nondiscretionary bonuses belong in the regular rate. Bonuses tied to predetermined criteria are not discretionary and must be included for each workweek in which they are earned.   
• Regular‑rate calculation is mechanical. Divide total straight‑time earnings (including bonuses that are not excludable) by all hours worked; pay a half‑time premium on that regular rate for overtime hours.
• Discretionary bonus exclusion is narrow. The employer must decide both the fact and amount of the bonus at its sole discretion at or near the end of the period, with generally no prior promise or expectation.

DOL’s opinion letter underscores the importance of accurately including nondiscretionary bonuses in the regular rate of pay for overtime calculations to ensure compliance with the FLSA. Employers with questions about this guidance should consult experienced counsel.