Bonuses are a great way to incentivize employees throughout the year. However, depending on the type of bonus and how it is structured, and whether the employee receiving the bonus is exempt or non-exempt, employers may have different obligations.

Non-Discretionary Bonuses 

Under the FLSA, non-discretionary bonuses are considered compensation for hours worked, services rendered, or performance and must be included in non-exempt employees’ regular rate of pay when calculating overtime. This means, when an employee earns a bonus over weeks or months, perhaps over a year or a quarter, companies will likely need to make a retroactive pay adjustment to ensure that non-exempt employees receive the full amount of overtime owed. Often, by the time the employee earns the bonus, the employee has already paid overtime based on their standard rate without the bonus, not the increased rate based that incorporates the employees’ bonus.

So, what is a non-discretionary bonus? Non-discretionary bonuses are all bonuses that the employee knows about and expects to receive. Some examples are:

• Bonuses based on a predetermined formula, such as individual or group production bonuses;
• Bonuses for quality and accuracy of work;
• Bonuses announced to employees to induce them to work more efficiently;
• Attendance bonuses; and
• Safety bonuses (i.e., number of days without safety incidents).

Discretionary Bonuses 

As their name suggests, discretionary bonuses are just that, optional. However, for a bonus to be truly discretionary, the way the company presents it to employees and what triggers the bonus will make the difference between whether the bonus is considered voluntary under the law.

For a bonus to be discretionary, it must meet the following statutory requirements:

1. The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
2. The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
3. The bonus payment is not made according to any prior contract, agreement, or promise, causing an employee to expect such payments regularly.

Discretionary bonuses are excludable from the regular pay rate and do not need to be considered when calculating overtime.

Ultimately, when providing non-exempt employees with bonuses, employers must be mindful of whether the bonus is discretionary or non-discretionary and whether they worked overtime during the time period the employee earned the bonus. If the bonus is non-discretionary, and the employee worked overtime, the company must incorporate the bonus into the employee’s rate. Failure to do so opens the employer up to wage and hour liability, and these types of mistakes can add up fast, especially with the potential for liquidated damages and attorney’s fees.