DOL Confirms Quarterly Bonus Calculated as a Percentage of Total Earnings Satisfies FLSA Overtime Requirements

Key takeaways

• The U.S. Department of Labor’s Wage and Hour Division (DOL) recently issued Opinion Letter FLSA2026-6, addressing whether an employer’s quarterly bonus program—which allocates a bonus pool based on each employee’s proportionate share of total gross compensation—satisfies the Fair Labor Standards Act’s (FLSA) overtime requirements. 
• The DOL concluded that, under the circumstances the employer presented, the quarterly bonus constitutes a valid “percentage of total earnings” bonus that simultaneously pays any overtime compensation due on the bonus. 
• Accordingly, the employer need not recompute the regular rate or pay additional overtime when it distributes the quarterly bonus.

The scenario at issue

An employer that pays a quarterly bonus to eligible nonexempt employees, at least some of whom work overtime, requested the opinion letter. At the end of each quarter, the employer determines eligible employees and the available bonus pool based on sales revenue. It then generates a gross earnings report reflecting both straight-time and overtime compensation that each eligible employee earned during the quarter.

To determine each employee’s share of the bonus pool, the employer calculates the percentage that the employee’s total gross compensation (straight time plus overtime) represents of the total gross compensation the employer paid to all eligible employees for the quarter, and then multiplies that percentage by the bonus pool. For example, if the bonus pool is $100,000 and an employee’s gross compensation constitutes 5% of total eligible employees’ gross compensation, that employee receives a $5,000 bonus.

The employer sought confirmation that this bonus structure qualifies as a “percentage of total earnings” bonus under the FLSA regulations, such that it need not perform additional regular-rate and overtime recomputation when it pays the bonus.

Legal framework

The FLSA requires employers to pay nonexempt employees overtime compensation at not less than one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The “regular rate” includes all remuneration for employment except those items that 29 U.S.C. § 207(e) specifically excludes, such as gifts, discretionary bonuses, and certain benefit contributions. Employers must generally include nondiscretionary bonuses in the regular rate.

When the employer cannot ascertain a bonus until after the workweeks in which employees earned it, the employer may disregard the bonus during those workweeks and, once it ascertains the amount, apportion it back over the earning period and pay any additional overtime due. See 29 C.F.R. § 778.209. However, employers need not recalculate the regular rate for a valid “percentage of total earnings” bonus. Under 29 C.F.R. §§ 778.210 and 778.503, when an employer computes a bonus as a percentage of an employee’s total earnings—including both straight-time and overtime compensation—the bonus increases both straight-time and overtime wages by the same fixed percentage. As a mathematical certainty, the bonus payment already incorporates proper overtime compensation, and requiring additional overtime would impermissibly impose “overtime upon overtime.” Siomkin v. Fairchild Camera & Instrument Corp., 174 F.2d 289, 294 (2d Cir. 1949).

DOL analysis

The DOL concluded that the employer’s quarterly bonus program satisfies the percentage-of-total-earnings rule, even though it uses a bonus pool allocation method rather than applying a fixed percentage directly to each employee’s earnings. The DOL reasoned that both methods produce an identical result: Each participating employee’s bonus equals the same fixed percentage of the employee’s own total earnings.

To illustrate, the DOL provided an example in which the employer distributes a bonus pool of $800 among employees whose combined straight-time and overtime earnings total $2,000. Each employee’s bonus equals 40% of that employee’s total earnings. Because the bonus increases both straight-time and overtime premium earnings by the same 40%, employees who worked overtime receive simultaneous overtime compensation on the bonus. This result matches what the employer would achieve by recomputing the regular rate under 29 C.F.R. § 778.209.

The DOL emphasized several important assumptions that underlie its conclusion:

• “Straight-time compensation” refers only to earnings that the employer uses to calculate overtime, excluding items such as gifts, discretionary bonuses, expense reimbursements, or employer benefit contributions that 29 U.S.C. § 207(e) excludes from the regular rate.
• “Overtime compensation” means overtime pay that the FLSA requires based on pre-bonus earnings.
• The employer does not further adjust gross compensation other than corrections for prior workweeks or limited deductions that the FLSA permits.
• The employer applies its method for aligning the workweek and quarter boundaries evenly and consistently each quarter.

Guardrails: When the percentage-of-total-earnings rule may not apply

The DOL cautioned that employers cannot use percentage-of-total-earnings bonuses to evade overtime requirements. Specifically, the DOL identified arrangements that would fall outside the rule:

• Reducing the bonus percentage in direct proportion to overtime hours worked;
• Applying a higher percentage to straight-time earnings than to overtime earnings;
• Diluting overtime by including regular-rate-excluded payments (such as discretionary bonuses or expense reimbursements) in the earnings base the employer uses to calculate the bonus.

The DOL noted, however, that employers may use factors such as seniority, work location, job title, base pay, performance, or conduct to determine the magnitude of the percentage increase they apply to each employee, so long as each employee’s pre-bonus overtime earnings increase by at least the same percentage as pre-bonus straight-time earnings.

Key takeaways for employers

• Bonus pool allocation methods can qualify as percentage-of-total-earnings bonuses. Employers need not apply a fixed percentage directly to each employee’s earnings. A pool-based allocation that distributes bonus dollars in proportion to each employee’s share of total compensation achieves the same result and satisfies the FLSA.
• Employers need not recompute the regular rate. When the bonus qualifies as a percentage of total earnings, the employer need not go back and recalculate the regular rate for each workweek in the bonus period—eliminating a potentially significant administrative burden for quarterly or annual bonus programs.
• The earnings base matters. Employers must base the calculation on straight-time and overtime compensation they actually use to determine the regular rate. Including excluded payments (gifts, discretionary bonuses, expense reimbursements, or benefit contributions) in the base could disqualify the bonus from the percentage-of-total-earnings rule.
• Employers may differentiate among employees within limits. Employers may vary bonus percentages by job title, seniority, performance, or other criteria—but the percentage they apply to overtime earnings must be at least as great as the percentage they apply to straight-time earnings for each individual employee.

Opinion Letter FLSA2026-6 provides clarity for employers that use bonus pool allocation methods, confirming that such programs can satisfy the FLSA’s overtime requirements without the administrative burden of regular-rate recomputation. However, the DOL’s guardrails underscore the importance of careful program design. Employers with quarterly or annual bonus programs should review their bonus formulas and calculation methodologies to confirm compliance and consult experienced counsel with any questions about their specific arrangements.