Employers who pay bonuses to nonexempt employees need to understand a deceptively simple wage-and-hour rule: overtime must be paid based on the employee’s regular rate of pay, not merely on the employee’s base hourly rate. When an employee receives commissions, shift differentials, incentive pay, production bonuses, attendance bonuses, or other compensation tied to their work performance, additional compensation may need to be included in the regular rate of pay used to calculate overtime pay.

How to calculate an employee’s regular rate of pay is the focus of a new opinion letter from the U.S. Department of Labor Wage Hour Division (FLSA2026-6), which addresses whether an employer’s quarterly bonus program qualified as a “percentage of total earnings” bonus under the FLSA regulations, so that the bonus already included the overtime compensation due on the bonus and did not require a separate overtime recalculation. These concepts are covered in more detail here.

The Regular Rate: More Than the Hourly Rate

The Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees’ overtime of not less than one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek. The regular rate of pay generally includes all remuneration related to employment unless a specific statutory exclusion applies. This is where employers often get sidetracked. Many payroll systems calculate overtime using only the employee’s base hourly rate. That may be correct for an employee who receives no additional compensation. But where a nonexempt employee receives a nondiscretionary bonus or other compensation tied to work productivity, attendance, revenue, or performance, the employer may need to include that payment in its calculation of the employee’s regular rate of pay. The result can be a hidden overtime underpayment. The employee receives time-and-one-half of their base hourly rate of pay, but not time-and-one-half of the correct regular rate of pay required under the FLSA.

Discretionary vs. Nondiscretionary Bonuses

A key threshold question in calculating an employee’s correct regular rate of pay is determining whether a bonus is discretionary or nondiscretionary. A discretionary bonus is one where both the fact of payment and the amount of payment are determined at the employer’s sole discretion at or near the end of the period, and the payment is not made pursuant to any prior contract, agreement, promise, policy, or practice that causes employees to expect it regularly. Examples of discretionary bonuses may include a surprise holiday bonus or an unannounced spot bonus, assuming the employer has preserved true discretion over whether to pay it and how much to pay. Discretionary bonuses do not need to be included in calculating the employee’s regular rate of pay.

A nondiscretionary bonus is different. If employees know in advance that they can earn the bonus by satisfying stated criteria, the bonus is generally nondiscretionary. Common examples of nondiscretionary bonuses include attendance bonuses, productivity bonuses, retention bonuses, safety bonuses, sales-based bonuses, and bonuses tied to meeting individual, team, departmental, or company goals. Those bonuses are compensation for employment and ordinarily must be included in the employee’s regular rate of pay. Simply calling a bonus “discretionary” in an employee handbook or offer letter does not make it so. The substance of the program controls. If the employer has announced the bonus, established eligibility criteria, tied the payment to measurable results, or created a reasonable expectation of payment, the bonus is likely nondiscretionary for FLSA regular rate of pay calculations.

What FLSA2026-6 Says About Percentage-of-Total-Earnings Bonuses

In FLSA2026-6, the employer paid eligible employees a quarterly bonus from a bonus pool based on sales revenue. At the end of the quarter, the employer calculated each eligible employee’s share of the pool by comparing that employee’s total gross compensation, including straight-time and overtime compensation, to the total gross compensation paid to all eligible employees. If an employee’s compensation represented 5% of the eligible employees’ total compensation, the employee received 5% of the bonus pool.

The WHD concluded that, under those facts, the bonus qualified as a percentage of total earnings bonus because this type of bonus increases both straight-time earnings and overtime earnings by the same percentage. As a mathematical matter, the bonus already includes the overtime component due on the bonus, which means that the employer did not need to go back and recompute each employee’s regular rate for each workweek in the quarter or make additional overtime payments to the affected employees. FLSA2026-6 is useful because it confirms that a bonus can qualify as a percentage-of-total-earnings bonus even when the employer allocates a bonus pool among employees, provided that the formula effectively pays each participating employee the same fixed percentage of that employee’s own total earnings, including overtime earnings.

The Compliance Trap

The WHD’s opinion is nuanced, though. The employer’s overtime pay formula worked because it included both straight-time and overtime earnings in the calculation and did not dilute the overtime portion. If, for example, the employer had calculated the bonus for only base wages, only on straight-time earnings, or in a manner that reduced the value of overtime earnings, the result could have been different. Similarly, the employer would have erred if its “total earnings” calculation had included items that were properly excluded from the regular rate of pay in the first place, such as discretionary bonuses, expense reimbursements, gifts, or employer benefit contributions. The employer’s calculation must be fully aligned with the FLSA’s regular rate of pay rules.

FLSA2026-6 also assumes consistent workweek alignment and proper treatment of the compensation being included. That is important. Overtime is a workweek-by-workweek obligation. Quarterly, monthly, or annual incentive plans may be administratively convenient, but they still must be reconciled with the FLSA’s weekly overtime framework unless a valid percentage-of-total-earnings bonus structure makes re-computation unnecessary.

Why Mistakes Are Expensive

Regular rate of pay errors are rarely isolated. If a payroll system has been excluding a nondiscretionary bonus or other compensation from overtime calculations for one employee, the same error is likely to have affected many employees over multiple pay periods. Potential employer exposure can include unpaid overtime, an equal amount in liquidated damages, civil money penalties, attorneys’ fees, DOL investigation costs, state-law wage claims, and collective or class action litigation. For employers operating in Virginia, Maryland, and the District of Columbia, state and local wage laws may add additional risk. The business impact can also be significant. Unpaid overtime disputes are document-heavy, disruptive, and often expensive to resolve. They can also damage employee trust, especially where employees believe incentive compensation was not properly counted toward overtime.

What Employers Should Do Now

Employers should review their pay practices before a WHD audit, employee complaint, or lawsuit forces the issue. A regular rate of pay audit should include a close review of:

• bonuses, commissions, and incentive plans;
• shift differentials, premiums, and stipends;
• pay codes used in the payroll system;
• treatment of overtime for nonexempt employees;
• written bonus plan language;
• actual payroll practices; and
• whether bonus formulas properly account for overtime earnings.

For employers considering a percentage-of-total-earnings bonus structure, FLSA2026-6 provides a helpful roadmap. But the details matter. A small drafting or payroll configuration error can convert a compliant plan into an overtime liability problem. Regular rate of pay compliance is not glamorous, but it is one of the most important wage-and-hour issues for employers with nonexempt workforces. An attorney-client privileged audit of bonus and overtime practices can identify issues early, allow employers to make corrections, and reduce the risk of costly litigation or agency enforcement.

If you have questions about your company’s bonus, incentive compensation, overtime, or regular rate of pay practices, please contact Doug Taylor at rdougtaylor@beankinney.com or (703) 526-5586, or your current Bean, Kinney & Korman attorney.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.